Document

______________________________________________________________________________________________________

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 March 31, 2017

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, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  [X]
  
Accelerated filer  [ ]
  
Non-accelerated filer [ ]  
  
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 common shares outstanding as of April 20, 2017: 315,503,892 ______________________________________________________________________________________________________

1

PULTEGROUP, INC.
TABLE OF CONTENTS

 
 
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)
 
 
March 31,
2017
 
December 31,
2016
 
(Unaudited)
 
(Note)
ASSETS
 
 
 
 
 
 
 
Cash and equivalents
$
397,758

 
$
698,882

Restricted cash
26,105

 
24,366

Total cash, cash equivalents, and restricted cash
423,863

 
723,248

House and land inventory
7,028,335

 
6,770,655

Land held for sale
48,563

 
31,728

Residential mortgage loans available-for-sale
345,379

 
539,496

Investments in unconsolidated entities
65,293

 
51,447

Other assets
829,625

 
857,426

Intangible assets
151,342

 
154,792

Deferred tax assets, net
1,028,414

 
1,049,408

 
$
9,920,814

 
$
10,178,200

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
Accounts payable
$
367,180

 
$
405,455

Customer deposits
240,745

 
187,891

Accrued and other liabilities
1,360,418

 
1,448,994

Income tax liabilities
41,941

 
34,860

Financial Services debt
140,381

 
331,621

Senior notes
3,110,004

 
3,110,016

 
5,260,669

 
5,518,837

Shareholders' equity
4,660,145

 
4,659,363

 
$
9,920,814

 
$
10,178,200


Note: The Condensed Consolidated Balance Sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles 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
 
March 31,
 
2017
 
2016
Revenues:
 
 
 
Homebuilding
 
 
 
Home sale revenues
$
1,585,421

 
$
1,394,243

Land sale revenues
1,640

 
2,487

 
1,587,061

 
1,396,730

Financial Services
41,767

 
35,848

Total revenues
1,628,828

 
1,432,578

 
 
 
 
Homebuilding Cost of Revenues:
 
 
 
Home sale cost of revenues
(1,217,678
)
 
(1,038,028
)
Land sale cost of revenues
(3,228
)
 
(2,028
)
 
(1,220,906
)
 
(1,040,056
)
 
 
 
 
Financial Services expenses
(28,367
)
 
(26,119
)
Selling, general, and administrative expenses
(236,268
)
 
(242,316
)
Other expense, net
(4,022
)
 
(5,874
)
Income before income taxes
139,265

 
118,213

Income tax expense
(47,747
)
 
(34,913
)
Net income
$
91,518

 
$
83,300

 
 
 
 
Per share:
 
 
 
Basic earnings
$
0.29

 
$
0.24

Diluted earnings
$
0.28

 
$
0.24

Cash dividends declared
$
0.09

 
$
0.09

 
 
 
 
Number of shares used in calculation:



Basic
317,756

 
347,815

Effect of dilutive securities
2,329

 
2,662

Diluted
320,085

 
350,477




See accompanying Notes to Condensed Consolidated Financial Statements.


4

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

 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income
$
91,518

 
$
83,300

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

 
21

Other comprehensive income
21

 
21

 
 
 
 
Comprehensive income
$
91,539

 
$
83,321





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, 2017
319,090

 
$
3,191

 
$
3,116,490

 
$
(526
)
 
$
1,540,208

 
$
4,659,363

Cumulative effect of accounting change (see Note 1)
—

 
—

 
(406
)
 
—

 
18,643

 
18,237

Stock option exercises
961

 
10

 
11,108

 
—

 
—

 
11,118

Share issuances, net of cancellations
677

 
10

 
3,556

 
—

 
—

 
3,566

Dividends declared
—

 
—

 
—

 
—

 
(28,838
)
 
(28,838
)
Share repurchases
(4,696
)
 
(50
)
 
—

 
—

 
(105,472
)
 
(105,522
)
Share-based compensation
—

 
—

 
10,682

 
—

 
—

 
10,682

Net income
—

 
—

 
—

 
—

 
91,518

 
91,518

Other comprehensive income
—

 
—

 
—

 
21

 
—

 
21

Shareholders' Equity, March 31, 2017
316,032

 
$
3,161

 
$
3,141,430

 
$
(505
)
 
$
1,516,059

 
$
4,660,145

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity, January 1, 2016
349,149

 
$
3,491

 
$
3,093,802

 
$
(609
)
 
$
1,662,641

 
$
4,759,325

Stock option exercises
4

 
—

 
52

 
—

 
—

 
52

Share issuances, net of cancellations
456

 
4

 
8,852

 
—

 
—

 
8,856

Dividends declared
—

 
—

 
—

 
—

 
(31,459
)
 
(31,459
)
Share repurchases
(3,226
)
 
(32
)
 
—

 
—

 
(52,713
)
 
(52,745
)
Share-based compensation
—

 
—

 
6,635

 
—

 
—

 
6,635

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

 
—

 
(458
)
 
—

 
—

 
(458
)
Net income
—

 
—

 
—

 
—

 
83,300

 
83,300

Other comprehensive income
—

 
—

 
—

 
21

 
—

 
21

Shareholders' Equity, March 31, 2016
346,383

 
$
3,463

 
$
3,108,883

 
$
(588
)
 
$
1,661,769

 
$
4,773,527



See accompanying Notes to Condensed Consolidated Financial Statements.

6

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
91,518

 
$
83,300

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Deferred income tax expense
39,226

 
50,026

Depreciation and amortization
13,209

 
13,113

Share-based compensation expense
14,161

 
9,355

Other, net
4,090

 
4,447

Increase (decrease) in cash due to:
 
 
 
Inventories
(267,014
)
 
(381,910
)
Residential mortgage loans available-for-sale
194,117

 
151,886

Other assets
21,858

 
(25,133
)
Accounts payable, accrued and other liabilities
(71,362
)
 
31,999

Net cash provided by (used in) operating activities
39,803

 
(62,917
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(9,996
)
 
(9,460
)
Investment in unconsolidated subsidiaries
(14,802
)
 
(13,534
)
Cash used for business acquisition
—

 
(430,011
)
Other investing activities, net
1,423

 
1,253

Net cash used in investing activities
(23,375
)
 
(451,752
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuance
—

 
991,575

Repayments of debt
(1,067
)
 
(702
)
Borrowings under revolving credit facility
—

 
220,000

Repayments under revolving credit facility
—

 
(220,000
)
Financial Services borrowings (repayments)
(191,240
)
 
(149,263
)
Stock option exercises
11,118

 
52

Share repurchases
(105,522
)
 
(52,745
)
Dividends paid
(29,102
)
 
(31,568
)
Net cash provided by (used in) financing activities
(315,813
)
 
757,349

Net increase (decrease)
(299,385
)
 
242,680

Cash, cash equivalents, and restricted cash at beginning of period
723,248

 
775,435

Cash, cash equivalents, and restricted cash at end of period
$
423,863

 
$
1,018,115

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid (capitalized), net
$
12,830

 
$
(23,124
)
Income taxes paid (refunded), net
$
1,043

 
$
1,212



See accompanying Notes to Condensed Consolidated Financial Statements.

7

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


1. Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States ("U.S."), and our common shares trade 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, 2016.

Business acquisition

We acquired substantially all of the assets of JW Homes ("Wieland") in January 2016 for $430.5 million in cash and the assumption of certain payables related to such assets. The acquired net assets were located in Atlanta, Charleston, Charlotte, Nashville, and Raleigh, and included approximately 7,000 lots, including 375 homes in inventory, and control of approximately 1,300 lots through land option contracts. We also assumed a sales order backlog of 317 homes. The acquired net assets were recorded at their estimated fair values and resulted in goodwill of $40.4 million and separately identifiable intangible assets of $18.0 million comprised of the John Wieland Homes and Neighborhoods tradename, which is being amortized over a 20-year life. The acquisition of these assets was not material to our results of operations or financial condition.

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.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

Subsequent events

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



8

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

Other expense, net

Other expense, net consists of the following ($000’s omitted): 
 
Three Months Ended
March 31,
2017
 
2016
Write-off of deposits and pre-acquisition costs
$
1,655

 
$
3,041

Amortization of intangible assets
3,450

 
3,450

Interest income
(833
)
 
(923
)
Interest expense
137

 
174

Equity in earnings of unconsolidated entities
(1,193
)
 
(170
)
Miscellaneous, net
806

 
302

Total other expense, net
$
4,022

 
$
5,874


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, unvested 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 diluted earnings per share calculation excluded 0.1 million and 2.3 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units, for the three months ended March 31, 2017 and 2016, 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):

9

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

 
Three Months Ended
March 31,
2017
 
2016
Numerator:
 
 
 
Net income
$
91,518

 
$
83,300

Less: earnings distributed to participating securities
(305
)
 
(285
)
Less: undistributed earnings allocated to participating securities
(618
)
 
(404
)
Numerator for basic earnings per share
$
90,595

 
$
82,611

Add back: undistributed earnings allocated to participating securities
618

 
404

Less: undistributed earnings reallocated to participating securities
(613
)
 
(401
)
Numerator for diluted earnings per share
$
90,600

 
$
82,614

 
 
 
 
Denominator:
 
 
 
Basic shares outstanding
317,756

 
347,815

Effect of dilutive securities
2,329

 
2,662

Diluted shares outstanding
320,085

 
350,477

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.29

 
$
0.24

Diluted
$
0.28

 
$
0.24


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. At March 31, 2017 and December 31, 2016, residential mortgage loans available-for-sale had an aggregate fair value of $345.4 million and $539.5 million, respectively, and an aggregate outstanding principal balance of $332.9 million and $529.7 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(2.0) million and $1.0 million for the three months ended March 31, 2017 and 2016, respectively. These changes in fair value were substantially offset by changes in the fair value of corresponding hedging instruments. Net gains from the sale of mortgages were $25.3 million and $21.5 million for the three months ended March 31, 2017 and 2016, respectively, and have been included in Financial Services revenues.

Derivative instruments and hedging activities

We are party to interest rate lock commitments ("IRLCs") with customers resulting from our mortgage origination operations. At March 31, 2017 and December 31, 2016, we had aggregate IRLCs of $354.7 million and $273.9 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.

We hedge our exposure to interest rate market risk relating to residential mortgage loans available-for-sale and IRLCs using forward contracts on mortgage-backed securities, which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and whole loan investor commitments, which are obligations of an investor to buy loans at a specified price within a specified time period. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments 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. At March 31, 2017 and December 31, 2016, we had unexpired forward contracts of $555.0 million and $610.0 million, respectively, and whole loan investor commitments of $102.2 million and $157.6 million, respectively. Changes in the fair value of IRLCs 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.

10

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

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on IRLCs 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 90 days.

The fair values of derivative instruments and their locations in the Condensed Consolidated Balance Sheets are summarized below ($000’s omitted):
 
 
March 31, 2017
 
December 31, 2016
 
Other Assets
 
Accrued and Other Liabilities
 
Other Assets
 
Accrued and Other Liabilities
Interest rate lock commitments
$
12,638

 
$
182

 
$
9,194

 
$
501

Forward contracts
323

 
3,292

 
8,085

 
1,004

Whole loan commitments
215

 
447

 
1,135

 
863

 
$
13,176

 
$
3,921

 
$
18,414

 
$
2,368


New accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 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. The FASB has also issued a number of updates to this standard. The standard is effective for us for annual and interim periods beginning January 1, 2018, and, at that time, we expect to apply the modified retrospective method of adoption. We continue to evaluate the impact that the standard will have on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. ASU 2016-02 is effective for us for annual and interim periods beginning January 1, 2019 and early adoption is permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact that the standard will have on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which includes multiple amendments intended to simplify aspects of share-based payment accounting, and was effective for us at January 1, 2017. Excess tax benefits or deficiencies for stock-based compensation are now reflected in the Consolidated Statements of Operations as a component of income tax expense, whereas previously they were recognized in equity. We have also elected to account for forfeitures as they occur, rather than estimate expected forfeitures. As a result of adopting ASU 2016-09, we applied the modified retrospective approach and recorded a cumulative-effect adjustment that increased our retained earnings and deferred tax assets as of January 1, 2017 by $18.6 million, respectively, as a result of previously unrecognized excess tax benefits (see Note 6). Additionally, the impact of recognizing excess tax benefits in the income statement resulted in a $2.8 million reduction in our income tax expense for the three months ended March 31, 2017. The remaining aspects of adopting ASU 2016-09 did not have a material impact on our financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology and also requires that credit losses from available-for-sale debt securities be presented as an allowance instead of a write-down. ASU 2016-13 is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted, and requires full retrospective application on adoption. We are currently evaluating the impact the standard will have on our financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which addresses several specific cash flow issues. ASU 2016-15 is

11

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

effective for us for annual and interim periods beginning January 1, 2018, with early adoption permitted, and requires full retrospective application on adoption. We do not expect ASU 2016-15 to have a material impact on our financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment" ("ASU 2017-04"), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 to have a material impact on our financial statements.

In February 2017, the FASB issued ASU No. 2017-05, "Other Income - Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (Subtopic 610-20)" ("ASU 2017-05"). ASU 2017-05 updates the definition of an "in substance nonfinancial asset" and clarifies the derecognition guidance for nonfinancial assets to conform with the new revenue recognition standard. The effective date and transition methods of ASU 2017-05 are aligned with ASU 2014-09 described above. We are currently evaluating the impact that the standard will have on our financial statements.

2. Inventory

Major components of inventory were as follows ($000’s omitted): 
 
March 31,
2017
 
December 31,
2016
Homes under construction
$
2,149,799

 
$
1,921,259

Land under development
4,181,691

 
4,072,109

Raw land
696,845

 
777,287

 
$
7,028,335

 
$
6,770,655


We capitalize interest cost into inventory during the active development and construction of our communities. 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
 
March 31,
 
2017
 
2016
Interest in inventory, beginning of period
$
186,097

 
$
149,498

Interest capitalized
44,923

 
35,284

Interest expensed
(27,192
)
 
(26,129
)
Interest in inventory, end of period
$
203,828

 
$
158,653

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.


12

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. No VIEs required consolidation at either March 31, 2017 or December 31, 2016 because we determined that we were not the VIEs' primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements.

The following provides a summary of our interests in land option agreements as of March 31, 2017 and December 31, 2016 ($000’s omitted): 
 
March 31, 2017
 
December 31, 2016
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
Land options with VIEs
$
71,558

 
$
842,784

 
$
68,527

 
$
849,901

Other land options
124,159

 
1,149,377

 
126,909

 
1,252,662

 
$
195,717

 
$
1,992,161

 
$
195,436

 
$
2,102,563




13

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, Virginia
Southeast:
 
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Midwest:
 
Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Ohio
Texas:
 
Texas
West:
 
Arizona, California, Nevada, New Mexico, Washington

We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking and title operations and operate generally in the same markets as the Homebuilding segments.
 
Operating Data by Segment
($000’s omitted)
 
Three Months Ended
 
March 31,
 
2017
 
2016
Revenues:
 
 
 
Northeast
$
108,582

 
$
118,654

Southeast
328,764

 
294,426

Florida
314,197

 
269,841

Midwest
244,412

 
189,892

Texas
234,266

 
213,292

West
356,840

 
310,625

 
1,587,061

 
1,396,730

Financial Services
41,767

 
35,848

Consolidated revenues
$
1,628,828

 
$
1,432,578

 
 
 
 
Income before income taxes:
 
 
 
Northeast
$
4,400

 
$
9,590

Southeast
32,366

 
19,770

Florida
44,523

 
40,302

Midwest
18,254

 
5,620

Texas
32,796

 
28,517

West
34,084

 
33,507

Other homebuilding (a)
(40,661
)
 
(28,873
)
 
125,762

 
108,433

Financial Services
13,503

 
9,780

Consolidated income before income taxes
$
139,265

 
$
118,213


(a)
Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments.

14

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

 
Operating Data by Segment
 
($000's omitted)
 
March 31, 2017
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
210,725

 
$
354,338

 
$
136,534

 
$
701,597

 
$
804,319

Southeast
378,835

 
647,074

 
145,945

 
1,171,854

 
1,277,838

Florida
329,061

 
811,341

 
113,061

 
1,253,463

 
1,389,509

Midwest
314,479

 
447,268

 
64,595

 
826,342

 
893,002

Texas
247,286

 
411,947

 
69,345

 
728,578

 
816,230

West
637,449

 
1,268,496

 
143,165

 
2,049,110

 
2,273,198

Other homebuilding (a)
31,964

 
241,227

 
24,200

 
297,391

 
2,055,489

 
2,149,799

 
4,181,691

 
696,845

 
7,028,335

 
9,509,585

Financial Services
—

 
—

 
—

 
—

 
411,229

 
$
2,149,799

 
$
4,181,691

 
$
696,845

 
$
7,028,335

 
$
9,920,814

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
175,253

 
$
375,899

 
$
135,447

 
$
686,599

 
$
798,369

Southeast
354,047

 
650,805

 
148,793

 
1,153,645

 
1,243,188

Florida
309,525

 
683,376

 
183,168

 
1,176,069

 
1,330,847

Midwest
256,649

 
474,287

 
50,302

 
781,238

 
851,457

Texas
219,606

 
413,312

 
74,750

 
707,668

 
793,917

West
580,082

 
1,226,190

 
159,387

 
1,965,659

 
2,200,058

Other homebuilding (a)
26,097

 
248,240

 
25,440

 
299,777

 
2,351,082

 
1,921,259

 
4,072,109

 
777,287

 
6,770,655

 
9,568,918

Financial Services
—

 
—

 
—

 
—

 
609,282

 
$
1,921,259

 
$
4,072,109

 
$
777,287

 
$
6,770,655

 
$
10,178,200

 
(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. Debt

Senior notes

Our senior notes are summarized as follows ($000’s omitted):
 
March 31,
2017
 
December 31,
2016
7.625% unsecured senior notes due October 2017 (a)
123,000

 
123,000

4.250% unsecured senior notes due March 2021 (b)
700,000

 
700,000

5.500% unsecured senior notes due March 2026 (b)
700,000

 
700,000

5.000% unsecured senior notes due January 2027 (b)
600,000

 
600,000

7.875% unsecured senior notes due June 2032 (b)
300,000

 
300,000

6.375% unsecured senior notes due May 2033 (b)
400,000

 
400,000

6.000% unsecured senior notes due February 2035 (b)
300,000

 
300,000

Net premiums, discounts, and issuance costs (c)
(12,996
)
 
(12,984
)
Total senior notes
$
3,110,004

 
$
3,110,016

Estimated fair value
$
3,206,575

 
$
3,112,297


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

In February 2016, we issued $1.0 billion of senior unsecured notes, consisting of $300 million of 4.25% senior notes due March 1, 2021, and $700 million of 5.50% senior notes due March 1, 2026.

Revolving credit facility

We maintain a senior unsecured revolving credit facility (the “Revolving Credit Facility”) that matures in June 2019 and provides for maximum borrowings of $750.0 million.  The Revolving Credit Facility contains an uncommitted accordion feature that could increase the size of the Revolving Credit Facility to $1.25 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 the available borrowing capacity under the Revolving Credit Facility with a sublimit of $375.0 million at March 31, 2017. 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.  We had no borrowings outstanding and $226.9 million and $219.1 million of letters of credit issued under the Revolving Credit Facility at March 31, 2017 and December 31, 2016, respectively.

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 March 31, 2017, 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 are party to limited recourse collateralized notes payable with third parties that totaled $20.0 million at March 31, 2017 and $19.3 million at December 31, 2016. These notes have maturities ranging up to four years, are collateralized by the 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%.


16

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

Joint venture debt

In March 2017, we provided a limited recourse guaranty under a revolving credit facility held by one of our unconsolidated joint ventures. The Company’s maximum financial loss exposure related to the guaranty is limited to our proportionate share of 50% of the amount outstanding under the facility ($52.5 million at March 31, 2017) that is determined to be owed due to a triggering event under such guaranty. The limited guaranty includes, but is not limited to, the following: (i) completion of certain aspects of the project; (ii) an environmental indemnity provided to the lender; and (iii) an indemnification of the lender from certain "bad boy acts" of the joint venture.

Pulte Mortgage

Pulte Mortgage maintains a master repurchase agreement (the “Repurchase Agreement”) with third party lenders that expires in August 2017. The maximum aggregate commitment is $200.0 million at March 31, 2017 and is effective through April 13, 2017, after which it decreases to $175.0 million. The purpose of 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 $140.4 million and $331.6 million outstanding under the Repurchase Agreement at March 31, 2017 and December 31, 2016, respectively, and was in compliance with all of its covenants and requirements as of such dates.

5. Shareholders’ equity

During the three months ended March 31, 2017, we declared cash dividends totaling $28.8 million and repurchased 4.7 million shares under our repurchase authorization for a total of $100.0 million. For the three months ended March 31, 2016, we declared cash dividends totaling $31.5 million and repurchased 3.1 million shares under our repurchase authorization for a total of $50.0 million. At March 31, 2017, we had remaining authorization to repurchase $904.8 million of common shares.

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 three months ended March 31, 2017 and 2016, participants surrendered shares valued at $5.5 million and $2.7 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

6. Income taxes

Our effective tax rate for the three months ended March 31, 2017 and 2016 was 34.3% and 29.5%, respectively. Our effective tax rate for the current period differed from the federal statutory tax rate primarily due to the tax benefits relating to the domestic production activities deduction and the deduction for equity compensation based on ASU 2016-09 as well as state income tax expense on current year earnings. For the same period in the prior year, our effective tax rate differed from the federal statutory tax rate primarily due to the favorable resolution of certain state income tax matters.

At March 31, 2017 and December 31, 2016, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $1.0 billion and $1.0 billion, respectively. 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.

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 March 31, 2017 and December 31, 2016, we had $20.7 million and $21.5 million, respectively, of gross unrecognized tax benefits and $11.8 million and $12.2 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 $17.3 million, excluding interest and penalties, primarily due to expirations of certain statutes of limitations and potential settlements.


17

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

As a result of the adoption of ASU No. 2016-09 (see Note 1), we recorded a cumulative-effect adjustment to increase retained earnings and deferred tax assets as of January 1, 2017 by $18.6 million, respectively, as a result of previously unrecognized excess tax benefits.

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 2005 to 2016.

7. 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
March 31,
2017
 
December 31,
2016
 
 
 
 
 
 
 
Measured at fair value on a recurring basis:
 
 
 
 
 
 
Residential mortgage loans available-for-sale
 
Level 2
 
$
345,379

 
$
539,496

Interest rate lock commitments
 
Level 2
 
12,456

 
8,693

Forward contracts
 
Level 2
 
(2,969
)
 
7,081

Whole loan commitments
 
Level 2
 
(232
)
 
272

 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
House and land inventory
 
Level 3
 
$
—

 
$
8,920

 
 
 
 
 
 
 
Disclosed at fair value:
 
 
 
 
 
 
Cash and equivalents (including restricted cash)
 
Level 1
 
$
423,863

 
$
723,248

Financial Services debt
 
Level 2
 
140,381

 
331,621

Senior notes
 
Level 2
 
3,206,575

 
3,112,297


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 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.


18

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

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 $3.1 billion and $3.1 billion at March 31, 2017 and December 31, 2016, respectively.

8. 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. Determining the liabilities for anticipated losses requires a significant level of management judgment. Given the nature of these claims and the uncertainty regarding their ultimate resolution, actual costs could differ from our current estimates. Changes in these liabilities were as follows ($000's omitted):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Liabilities, beginning of period
$
35,114

 
$
46,381

Reserves provided (released), net
2

 
866

Payments
—

 
(154
)
Liabilities, end of period
$
35,116

 
$
47,093


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 $226.9 million and $1.1 billion, respectively, at March 31, 2017 and $219.1 million and $1.1 billion, respectively, at December 31, 2016. 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 projects that have 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

19

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

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 and in limited instances exceeding 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
 
March 31,
 
2017
 
2016
Warranty liabilities, beginning of period
$
66,134

 
$
61,179

Reserves provided
10,643

 
12,319

Payments
(12,099
)
 
(12,562
)
Other adjustments
3

 
—

Warranty liabilities, end of period
$
64,681

 
$
60,936


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 us. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by us. 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 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.

Our recorded reserves for all such claims totaled $835.3 million and $831.1 million at March 31, 2017 and December 31, 2016, respectively, the vast majority of which relates to general liability claims. The recorded reserves include loss estimates

20

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

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 70% of the total general liability reserves at both March 31, 2017 and December 31, 2016. 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.

Housing market conditions have been volatile across most of our markets over the past ten years, and we believe such conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority 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. 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. Adjustments to reserves are recorded in the period in which the change in estimate occurs.

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
 
March 31,
 
2017
 
2016
Balance, beginning of period
$
831,058

 
$
924,563

Reserves provided, net
17,735

 
19,751

Payments, net (a)
(13,467
)
 
(21,929
)
Balance, end of period
$
835,326

 
$
922,385


(a) Includes net changes in amounts expected to be recovered from our insurance carriers, which are recorded to other assets (see below).

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. Such receivables are recorded in other assets and totaled $291.8 million and $307.3 million at March 31, 2017 and December 31, 2016, respectively. The insurance receivables relate to costs incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of construction defect claims that we believe are insured. Given the complexity inherent with resolving construction defect claims in the homebuilding industry as described above, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers. In addition, disputes between homebuilders and carriers over coverage positions relating to construction defect claims are common. Resolution of claims with carriers involves the exchange of significant amounts of information and frequently involves legal action. During the three months ended March 31, 2017, we wrote-off $15.0 million of insurance receivables in conjunction with settling insurance policies with multiple carriers covering multiple years.

Additionally, we are the plaintiff in litigation with certain of our insurance carriers in regard to $99.3 million of recorded insurance receivables relating to the applicability of coverage to such costs under their policies. We believe collection of these insurance receivables, including those in litigation, is probable based on the legal merits of our positions after review by legal counsel, favorable legal rulings received to date, the high credit ratings of our carriers, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims, including significant amounts funded by the above carriers under different policies. While the outcome of these matters 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.


21

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


9. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by certain of our wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Our subsidiaries comprising the Financial Services segment along with certain other subsidiaries (collectively, the "Non-Guarantor Subsidiaries") do not guarantee the senior notes. In accordance with Rule 3-10 of Regulation S-X, 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.


 CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2017
($000’s omitted)
 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
—

 
$
327,047

 
$
70,711

 
$
—

 
$
397,758

Restricted cash
—

 
25,055

 
1,050

 
—

 
26,105

Total cash, cash equivalents, and
restricted cash
—

 
352,102

 
71,761

 
—

 
423,863

House and land inventory
—

 
6,955,235

 
73,100

 
—

 
7,028,335

Land held for sale
—

 
48,053

 
510

 
—

 
48,563

Residential mortgage loans available-
for-sale
—

 
—

 
345,379

 
—

 
345,379

Investments in unconsolidated entities
112

 
59,803

 
5,378

 
—

 
65,293

Other assets
11,509

 
697,869

 
120,247

 
—

 
829,625

Intangible assets
—

 
151,342

 
—

 
—

 
151,342

Deferred tax assets, net
1,030,351

 
—

 
(1,937
)
 
—

 
1,028,414

Investments in subsidiaries and
intercompany accounts, net
6,849,655

 
(331,013
)
 
6,991,618

 
(13,510,260
)
 
—

 
$
7,891,627

 
$
7,933,391

 
$
7,606,056

 
$
(13,510,260
)
 
$
9,920,814

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
accrued and other liabilities
$
79,537

 
$
1,703,179

 
$
185,627

 
$
—

 
$
1,968,343

Income tax liabilities
41,941

 
—

 
—

 
—

 
41,941

Financial Services debt
—

 
—

 
140,381

 
—

 
140,381

Senior notes
3,110,004

 
—

 
—

 
—

 
3,110,004

Total liabilities
3,231,482

 
1,703,179

 
326,008

 
—

 
5,260,669

Total shareholders’ equity
4,660,145

 
6,230,212

 
7,280,048

 
(13,510,260
)
 
4,660,145

 
$
7,891,627

 
$
7,933,391

 
$
7,606,056

 
$
(13,510,260
)
 
$
9,920,814



22

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

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2016
($000’s omitted)
 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
—

 
$
588,353

 
$
110,529

 
$
—

 
$
698,882

Restricted cash
—

 
22,832

 
1,534

 
—

 
24,366

Total cash, cash equivalents, and
restricted cash
—

 
611,185

 
112,063

 
—

 
723,248

House and land inventory
—

 
6,707,392

 
63,263

 
—

 
6,770,655

Land held for sale
—

 
31,218

 
510

 
—

 
31,728

Residential mortgage loans available-
for-sale
—

 
—

 
539,496

 
—

 
539,496

Investments in unconsolidated entities
105

 
46,248

 
5,094

 
—

 
51,447

Other assets
12,364

 
716,923

 
128,139

 
—

 
857,426

Intangible assets
—

 
154,792

 
—

 
—

 
154,792

Deferred tax assets, net
1,051,351

 
—

 
(1,943
)
 
—

 
1,049,408

Investments in subsidiaries and
intercompany accounts, net
6,835,075

 
(376,748
)
 
6,845,781

 
(13,304,108
)
 
—

 
$
7,898,895

 
$
7,891,010

 
$
7,692,403

 
$
(13,304,108
)
 
$
10,178,200

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
accrued and other liabilities
$
94,656

 
$
1,755,756

 
$
191,928

 
$
—

 
$
2,042,340

Income tax liabilities
34,860

 
—

 
—

 
—

 
34,860

Financial Services debt
—

 
—

 
331,621

 
—

 
331,621

Senior notes
3,110,016

 
—

 
—

 
—

 
3,110,016

Total liabilities
3,239,532

 
1,755,756

 
523,549

 
—

 
5,518,837

Total shareholders’ equity
4,659,363

 
6,135,254

 
7,168,854

 
(13,304,108
)
 
4,659,363

 
$
7,898,895

 
$
7,891,010

 
$
7,692,403

 
$
(13,304,108
)
 
$
10,178,200



23

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

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2017
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$
—

 
$
1,576,645

 
$
8,776

 
$
—

 
$
1,585,421

Land sale revenues
—

 
867

 
773

 
—

 
1,640

 
—

 
1,577,512

 
9,549

 
—

 
1,587,061

Financial Services
—

 
—

 
41,767

 
—

 
41,767

 
—

 
1,577,512

 
51,316

 
—

 
1,628,828

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues
—

 
(1,209,640
)
 
(8,038
)
 
—

 
(1,217,678
)
Land sale cost of revenues
—

 
(2,595
)
 
(633
)
 
—

 
(3,228
)
 
—

 
(1,212,235
)
 
(8,671
)
 
—

 
(1,220,906
)
Financial Services expenses
—

 
(139
)
 
(28,228
)
 
—

 
(28,367
)
Selling, general, and administrative
expenses
—

 
(217,975
)
 
(18,293
)
 
—

 
(236,268
)
Other expense, net
(130
)
 
(11,843
)
 
7,951

 
—

 
(4,022
)
Intercompany interest
(335
)
 
—

 
335

 
—

 
—

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(465
)
 
135,320

 
4,410

 
—

 
139,265

Income tax (expense) benefit
177

 
(45,925
)
 
(1,999
)
 
—

 
(47,747
)
Income (loss) before equity in income
(loss) of subsidiaries
(288
)
 
89,395

 
2,411

 
—

 
91,518

Equity in income (loss) of subsidiaries
91,806

 
7,253

 
37,309

 
(136,368
)
 
—

Net income (loss)
91,518

 
96,648

 
39,720

 
(136,368
)
 
91,518

Other comprehensive income
21

 
—

 
—

 
—

 
21

Comprehensive income (loss)
$
91,539

 
$
96,648

 
$
39,720

 
$
(136,368
)
 
$
91,539



24

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

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2016
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$
—

 
$
1,393,259

 
$
984

 
$
—

 
$
1,394,243

Land sale revenues
—

 
2,010

 
477

 
—

 
2,487

 
—

 
1,395,269

 
1,461

 
—

 
1,396,730

Financial Services
—

 
—

 
35,848

 
—

 
35,848

 
—

 
1,395,269

 
37,309

 
—

 
1,432,578

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues
—

 
(1,035,864
)
 
(2,164
)
 
—

 
(1,038,028
)
Land sale cost of revenues
—

 
(1,643
)
 
(385
)
 
—

 
(2,028
)
 
—

 
(1,037,507
)
 
(2,549
)
 
—

 
(1,040,056
)
Financial Services expenses
—

 
(123
)
 
(25,996
)
 
—

 
(26,119
)
Selling, general, and administrative
expenses
—

 
(238,882
)
 
(3,434
)
 
—

 
(242,316
)
Other expense, net
(170
)
 
(9,676
)
 
3,972

 
—

 
(5,874
)
Intercompany interest
(510
)
 
(2,184
)
 
2,694

 
—

 
—

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(680
)
 
106,897

 
11,996

 
—

 
118,213

Income tax (expense) benefit
263

 
(30,568
)
 
(4,608
)
 
—

 
(34,913
)
Income (loss) before equity in income
(loss) of subsidiaries
(417
)
 
76,329

 
7,388

 
—

 
83,300

Equity in income (loss) of subsidiaries
83,717

 
7,010

 
111,918

 
(202,645
)
 
—

Net income (loss)
83,300

 
83,339

 
119,306

 
(202,645
)
 
83,300

Other comprehensive income
21

 
—

 
—

 
—

 
21

Comprehensive income (loss)
$
83,321

 
$
83,339

 
$
119,306

 
$
(202,645
)
 
$
83,321





















25

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

CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2017
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Net cash provided by (used in)
operating activities
$
(141,566
)
 
$
(8,041
)
 
$
189,410

 
$
—

 
$
39,803

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(8,442
)
 
(1,554
)
 
—

 
(9,996
)
Investment in unconsolidated subsidiaries
—

 
(14,802
)
 
—

 
—

 
(14,802
)
Other investing activities, net
—

 
2

 
1,421

 
—

 
1,423

Net cash provided by (used in)
investing activities
—

 
(23,242
)
 
(133
)
 
—

 
(23,375
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Financial Services borrowings (repayments)
—

 
—

 
(191,240
)
 
—

 
(191,240
)
Proceeds from debt issuance
—

 
—

 
—

 
—

 
—

Repayments of debt
—

 
(741
)
 
(326
)
 
—

 
(1,067
)
Borrowings under revolving credit facility
—

 
—

 
—

 
—

 
—

Repayments under revolving credit facility
—

 
—