Edgar Filing: PULTEGROUP INC/MI/

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 June 30, 2018

[ ] 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, 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 July 19, 2018: 284,018,567 ______________________________________________________________________________________________________

PULTEGROUP, INC.

TABLE OF CONTENTS



		Page No.
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017	3

	Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017	4

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017	5

	Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2018 and 2017	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4	Controls and Procedures	49

PART II	OTHER INFORMATION	50

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 6	Exhibits	51

	Signatures	52

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PULTEGROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($000’s omitted)



	June 30, 2018		December 31, 2017
	(Unaudited)		(Note)
ASSETS

Cash and equivalents	$	367,091	$	272,683
Restricted cash	34,824		33,485
Total cash, cash equivalents, and restricted cash	401,915		306,168
House and land inventory	7,499,665		7,147,130
Land held for sale	77,941		68,384
Residential mortgage loans available-for-sale	369,634		570,600
Investments in unconsolidated entities	61,718		62,957
Other assets	759,230		745,123
Intangible assets	134,092		140,992
Deferred tax assets, net	511,381		645,295
	$	9,815,576	$	9,686,649

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	399,330	$	393,815
Customer deposits	354,968		250,779
Accrued and other liabilities	1,242,349		1,356,333
Income tax liabilities	22,484		86,925
Financial Services debt	264,043		437,804
Notes payable	3,005,690		3,006,967
	5,288,864		5,532,623
Shareholders' equity	4,526,712		4,154,026
	$	9,815,576	$	9,686,649

Note: The Condensed Consolidated Balance Sheet at December 31, 2017 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.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(000’s omitted, except per share data)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Revenues:
Homebuilding
Home sale revenues	$	2,450,054		$	1,965,641		$	4,361,652		$	3,551,063
Land sale and other revenues	66,904			8,944			79,461			11,632
	2,516,958			1,974,585			4,441,113			3,562,695
Financial Services	52,764			47,275			98,702			89,042
Total revenues	2,569,722			2,021,860			4,539,815			3,651,737

Homebuilding Cost of Revenues:
Home sale cost of revenues	(1,862,133		)	(1,549,937		)	(3,322,073		)	(2,767,615		)
Land sale cost of revenues	(38,183		)	(87,599		)	(49,731		)	(90,827		)
	(1,900,316		)	(1,637,536		)	(3,371,804		)	(2,858,442		)

Financial Services expenses	(32,224		)	(28,478		)	(64,436		)	(56,846		)
Selling, general, and administrative expenses	(226,056		)	(216,211		)	(466,950		)	(452,479		)
Other expense, net	(1,956		)	(17,088		)	(3,263		)	(22,157		)
Income before income taxes	409,170			122,547			633,362			261,813
Income tax expense	(85,081		)	(21,798		)	(138,521		)	(69,545		)
Net income	$	324,089		$	100,749		$	494,841		$	192,268

Per share:
Basic earnings	$	1.12		$	0.32		$	1.72		$	0.60
Diluted earnings	$	1.12		$	0.32		$	1.71		$	0.60
Cash dividends declared	$	0.09		$	0.09		$	0.18		$	0.18

Number of shares used in calculation:
Basic	285,276			312,315			285,976			315,021
Effect of dilutive securities	1,378			1,565			1,088			1,946
Diluted	286,654			313,880			287,064			316,967

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($000’s omitted)

(Unaudited)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net income	$	324,089	$	100,749	$	494,841	$	192,268

Other comprehensive income, net of tax:
Change in value of derivatives	30		20		50		41
Other comprehensive income	30		20		50		41

Comprehensive income	$	324,119	$	100,769	$	494,891	$	192,309

See accompanying Notes to Condensed Consolidated Financial Statements.

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		$			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Shareholders' Equity, January 1, 2018	286,752		$	2,868		$	3,171,542		$	(445	)	$	980,061		$	4,154,026
Cumulative effect of accounting change (see Note 1)	—		—			—			—			22,411			22,411
Stock option exercises	434		4			4,463			—			—			4,467
Share issuances, net of cancellations	870		8			3,475			—			—			3,483
Dividends declared						—			—			(51,966		)	(51,966		)
Share repurchases	(3,694	)	(37		)	(284		)	—			(112,170		)	(112,491		)
Share-based compensation	—		—			11,891			—			—			11,891
Net income	—		—			—			—			494,841			494,841
Other comprehensive income	—		—			—			50			—			50
Shareholders' Equity, June 30, 2018	284,362		$	2,843		$	3,191,087		$	(395	)	$	1,333,177		$	4,526,712

Shareholders' Equity, January 1, 2017	319,090		$	3,191		$	3,116,490		$	(526	)	$	1,540,208		$	4,659,363
Cumulative effect of accounting change	—		—			(406		)	—			18,643			18,237
Stock option exercises	1,378		14			15,952			—			—			15,966
Share issuances, net of cancellations	729		10			3,554			—			—			3,564
Dividends declared	—		—			—			—			(56,941		)	(56,941		)
Share repurchases	(17,498	)	(178		)	—			—			(405,641		)	(405,819		)
Share-based compensation	—		—			17,323			—			—			17,323
Net income	—		—			—			—			192,268			192,268
Other comprehensive income	—		—			—			41			—			41
Shareholders' Equity, June 30, 2017	303,699		$	3,037		$	3,152,913		$	(485	)	$	1,288,537		$	4,444,002

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)



	Six Months Ended
	June 30,
	2018			2017
Cash flows from operating activities:
Net income	$	494,841		$	192,268
Adjustments to reconcile net income to net cash from operating activities:
Deferred income tax expense	126,991			80,841
Land-related charges	5,841			129,108
Depreciation and amortization	24,161			26,023
Share-based compensation expense	16,162			20,871
Other, net	(2,803		)	(1,536		)
Increase (decrease) in cash due to:
Inventories	(281,362		)	(486,393		)
Residential mortgage loans available-for-sale	199,623			172,943
Other assets	15,822			15,309
Accounts payable, accrued and other liabilities	(51,694		)	26,892
Net cash provided by (used in) operating activities	547,582			176,326
Cash flows from investing activities:
Capital expenditures	(33,059		)	(16,892		)
Investments in unconsolidated entities	(1,000		)	(17,832		)
Other investing activities, net	6,915			3,143
Net cash used in investing activities	(27,144		)	(31,581		)
Cash flows from financing activities:
Repayments of debt	(82,432		)	(2,153		)
Borrowings under revolving credit facility	1,566,000			110,000
Repayments under revolving credit facility	(1,566,000		)	(110,000		)
Financial Services borrowings (repayments)	(173,761		)	(177,918		)
Debt issuance costs	(8,090		)	—
Stock option exercises	4,467			15,966
Share repurchases	(112,491		)	(405,819		)
Dividends paid	(52,384		)	(58,214		)
Net cash provided by (used in) financing activities	(424,691		)	(628,138		)
Net increase (decrease)	95,747			(483,393		)
Cash, cash equivalents, and restricted cash at beginning of period	306,168			723,248
Cash, cash equivalents, and restricted cash at end of period	$	401,915		$	239,855

Supplemental Cash Flow Information:
Interest paid (capitalized), net	$	(387	)	$	(2,359	)
Income taxes paid (refunded), net	$	77,077		$	(10,980	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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 engage in mortgage banking operations, conducted through Pulte Mortgage LLC (“Pulte Mortgage”), title services, and insurance brokerage 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, 2017.

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").

Other expense, net

Other expense, net consists of the following ($000’s omitted):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Write-offs of deposits and pre-acquisition costs	$	(1,652	)	$	(5,063	)	$	(4,261	)	$	(6,718	)
Amortization of intangible assets	(3,450		)	(3,450		)	(6,900		)	(6,900		)
Interest income	835			599			1,399			1,432
Interest expense	(165		)	(134		)	(308		)	(271		)
Equity in earnings (losses) of unconsolidated entities (a)	265			(5,763		)	1,226			(4,569		)
Miscellaneous, net	2,211			(3,277		)	5,581			(5,131		)
Total other expense, net	$	(1,956	)	$	(17,088	)	$	(3,263	)	$	(22,157	)


(a)	Includes an $8.0 million impairment of an investment in an unconsolidated entity in the three and six months ended June 30, 2017 (see Note 2).

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Revenue recognition

Home sale revenues - Home sale revenues and related profit are generally recognized when title to and possession of the home are transferred to the buyer at the home closing date. Our performance obligation to deliver the agreed-upon home is generally satisfied in less than one year from the original contract date. Home sale contract assets consist of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit and classified as cash. Contract liabilities include customer deposit liabilities related to sold but undelivered homes, which totaled 355.0 million and 250.8 million at June 30, 2018 and December 31, 2017, respectively. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. See Note 8 for information on warranties and related obligations.

Land sale revenues - 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 sales are generally outright sales of specified land parcels with cash consideration due on the closing date, which is generally when performance obligations are satisfied. During the three and six months ended June 30, 2018, we closed on a number of land sale transactions that generated gains totaling $27.3 million, as the proceeds from the sales exceeded the cost basis of the land. All performance obligations related to these transactions were satisfied at closing.

Financial services revenues - Loan origination fees, commitment fees, and certain direct loan origination costs are recognized as incurred. 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. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when related mortgage payments are received or the sub-servicing fees are earned.

Revenues associated with our title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. Insurance brokerage commissions relate to commissions on homeowner and other insurance policies placed with third party carriers through various agency channels. Our performance obligations for policy renewal commissions are satisfied upon issuance of the initial policy. The contract assets for estimated future renewal commissions are included in other assets and totaled $29.8 million at June 30, 2018. Contract assets totaling $27.7 million were recognized on January 1, 2018, in conjunction with the adoption of Accounting Standards Codification 606, "Revenue from Contracts with Customers" ("ASC 606"). Refer to "New accounting pronouncements" within Note 1 for further discussion.

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.

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):

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Numerator:
Net income	$	324,089		$	100,749		$	494,841		$	192,268
Less: earnings distributed to participating securities	(300		)	(300		)	(595		)	(605		)
Less: undistributed earnings allocated to participating securities	(3,284		)	(772		)	(2,584		)	(1,330		)
Numerator for basic earnings per share	$	320,505		$	99,677		$	491,662		$	190,333
Add back: undistributed earnings allocated to participating securities	3,284			772			2,584			1,330
Less: undistributed earnings reallocated to participating securities	(3,268		)	(768		)	(2,575		)	(1,322		)
Numerator for diluted earnings per share	$	320,521		$	99,681		$	491,671		$	190,341

Denominator:
Basic shares outstanding	285,276			312,315			285,976			315,021
Effect of dilutive securities	1,378			1,565			1,088			1,946
Diluted shares outstanding	286,654			313,880			287,064			316,967

Earnings per share:
Basic	$	1.12		$	0.32		$	1.72		$	0.60
Diluted	$	1.12		$	0.32		$	1.71		$	0.60

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 June 30, 2018 and December 31, 2017, residential mortgage loans available-for-sale had an aggregate fair value of $369.6 million and $570.6 million, respectively, and an aggregate outstanding principal balance of $359.2 million and $553.5 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(0.2) million and $(2.2) million for the three months ended June 30, 2018 and 2017, respectively, and $(0.3) million and $(4.1) million for the six months ended June 30, 2018 and 2017, 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 $29.2 million and $27.7 million for the three months ended June 30, 2018 and 2017, respectively, and $56.2 million and $52.9 million for the six months ended June 30, 2018 and 2017, 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 June 30, 2018 and December 31, 2017, we had aggregate IRLCs of $426.5 million and $210.9 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 June 30, 2018 and December 31, 2017, we had unexpired forward contracts of $568.0 million and $522.0 million, respectively, and whole loan investor commitments of

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

$186.7 million and $203.1 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.

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 60 days.

The fair values of derivative instruments and their locations in the Condensed Consolidated Balance Sheets are summarized below ($000’s omitted):



	June 30, 2018				December 31, 2017
	Other Assets		Accrued and Other Liabilities		Other Assets		Accrued and Other Liabilities
Interest rate lock commitments	$	12,139	$	505	$	5,990	$	407
Forward contracts	189		2,429		432		817
Whole loan commitments	721		315		794		941
	$	13,049	$	3,249	$	7,216	$	2,165

New accounting pronouncements

On January 1, 2018, we adopted ASC 606, which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services and satisfaction of performance obligations to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. We applied the modified retrospective method to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the previous accounting standards. We recorded a net increase to opening retained earnings of $22.4 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact primarily related to the recognition of contract assets for insurance brokerage commission renewals. There was not a material impact to revenues as a result of applying ASC 606 for the six months ended June 30, 2018, and there have not been significant changes to our business processes, systems, or internal controls as a result of implementing the standard.

We adopted Accounting Standards Update ("ASU") No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), as of January 1, 2018, on a retrospective basis. The ASU addresses several specific cash flow issues. The adoption of ASU 2016-15 had no effect on our financial statements.

In February 2016, the Financial Accounting Standards Board ("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. While the recognition of right-of-use assets and related liabilities will have a material effect on our consolidated balance sheets, we do not expect a material impact on our consolidated statements of operations. The FASB also issued ASU No. 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842", which provides guidance on specific transition issues. We continue to evaluate the full impact of the new standards, including the impact on our business processes, systems, and internal controls.

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 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

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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.

2. Inventory

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



	June 30, 2018		December 31, 2017
Homes under construction	$	2,922,260	$	2,421,405
Land under development	4,045,615		4,135,814
Raw land	531,790		589,911
	$	7,499,665	$	7,147,130

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						Six Months Ended
	June 30,						June 30,
	2018			2017			2018			2017
Interest in inventory, beginning of period	$	240,013		$	203,828		$	226,611		$	186,097
Interest capitalized	43,771			44,949			87,731			89,872
Interest expensed	(40,157		)	(35,927		)	(70,715		)	(63,119		)
Interest in inventory, end of period	$	243,627		$	212,850		$	243,627		$	212,850

Land option agreements

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

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. No VIEs required consolidation at either June 30, 2018 or December 31, 2017 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.

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The following provides a summary of our interests in land option agreements as of June 30, 2018 and December 31, 2017 ($000’s omitted):



	June 30, 2018				December 31, 2017
	Deposits and Pre-acquisition Costs		Remaining Purchase Price		Deposits and Pre-acquisition Costs		Remaining Purchase Price
Land options with VIEs	$	73,940	$	1,145,136	$	78,889	$	977,480
Other land options	144,497		1,603,950		129,098		1,485,099
	$	218,437	$	2,749,086	$	207,987	$	2,462,579

Land-related charges

We recorded the following significant land-related charges in the three months ended June 30, 2017 ($000's omitted):



	Statement of Operations Classification	June 30,
	Statement of Operations Classification	2017
Net realizable value adjustments ("NRV") - land held for sale	Land sale cost of revenues	$	81,006
Land inventory impairments	Home sale cost of revenues	31,487
Impairments of unconsolidated entities	Other expense, net	8,017
Write-offs of deposits and pre-acquisition costs	Other expense, net	5,063
Total land-related charges		$	125,573

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. The NRV adjustments for the three months ended June 30, 2017 were primarily the result of a plan we announced in May 2017 to sell select non-core and underutilized land parcels following a strategic review of our land portfolio, pursuant to which it was determined that we would sell certain inactive land parcels, representing approximately 17 communities and 4,600 lots. These land parcels were located in diverse geographic areas and no longer fit into our strategic plans. The land parcels identified for sale included: land requiring significant additional development spend that would not yield suitable returns; land in excess of near-term need; and land entitled for certain product types inconsistent with our primary offerings. As a consequence of the change in strategy with respect to the future use of these land parcels, we recorded NRV adjustments totaling $81.0 million in the three months ended June 30, 2017 relating to inventory with a pre-NRV carrying value of $151.0 million. The estimated fair values of these inactive land parcels held for sale were generally based on comparisons to market comparable transactions, letters of intent, active negotiations with market participants, or similar market-based information supplemented in certain instances by estimated future net cash flows discounted for inherent risk associated with each underlying asset.

Land inventory impairments relate to communities that are either active or that we intend to eventually open and build out. As part of the May 2017 strategic review, we decided to accelerate the monetization of two small communities primarily through a combination of changing the product offerings and lowering the sales prices within the communities. This decision resulted in land impairments of $31.5 million in the three months ended June 30, 2017.

We determine the fair value of a community's inventory, and any related impairments, using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the discounted cash flow models are specific to each community, which may be located in a variety of geographic markets, and offer homes at sales

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

prices reflective of the product offering and market. Accordingly, determining the fair value of a community's inventory involves a number of variables, many of which are interrelated.

The table below summarizes certain quantitative unobservable inputs utilized in determining the fair value of impairments recorded in the three months ended June 30, 2017:



	Range
	June 30, 2017
Average selling price ($000s)	$253	to	$461
Sales pace per quarter (units)	5	to	9
Discount rate	18%	to	25%

Our evaluations for impairments are based on our best estimates of the future cash flows to be generated from our communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.

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.

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,
	2018			2017			2018			2017
Revenues:
Northeast	$	200,626		$	148,303		$	333,062		$	256,904
Southeast	445,506			381,132			820,129			710,244
Florida	455,637			363,421			804,346			677,717
Midwest	356,466			357,985			653,972			602,491
Texas	330,692			288,669			577,331			523,210
West	728,031			435,075			1,252,273			792,129
	2,516,958			1,974,585			4,441,113			3,562,695
Financial Services	52,764			47,275			98,702			89,042
Consolidated revenues	$	2,569,722		$	2,021,860		$	4,539,815		$	3,651,737

Income (loss) before income taxes (d):
Northeast	$	25,158		$	(38,249	)	$	34,470		$	(33,849	)
Southeast	54,357			40,274			94,814			72,640
Florida (a)	67,491			36,110			112,436			80,633
Midwest	43,050			37,573			71,451			55,827
Texas	50,859			46,522			81,395			79,318
West (b)	154,414			(1,850		)	243,619			32,234
Other homebuilding (c)	(6,876		)	(16,781		)	(39,374		)	(57,441		)
	388,453			103,599			598,811			229,362
Financial Services	20,717			18,948			34,551			32,451
Consolidated income before income taxes	$	409,170		$	122,547		$	633,362		$	261,813


(a)	Florida includes a warranty charge of $12.1 million for the three and six months ended June 30, 2017 related to a closed-out community (see Note 8).


(b)	West includes gains of $26.4 million related to two land sale transactions in California that closed in the three and six months ended June 30, 2018.

(c)

Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments. Other homebuilding also includes insurance reserve reversals of $37.9 million and $19.8 million for the three and six months ended June 30, 2018 and 2017, respectively, and a write-off of $15.0 million of insurance receivables associated with the resolution of certain insurance matters in the six months ended June 30, 2017 (see Note 8).


(d)	Includes land-related charges, as summarized in the below table.

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,
	2018		2017		2018		2017
Land-related charges*:
Northeast	$	498	$	49,820	$	1,683	$	49,918
Southeast	689		491		1,731		958
Florida	226		8,602		409		8,754
Midwest	372		7,567		1,118		8,095
Texas	220		589		270		847
West	148		54,409		361		56,441
Other homebuilding	269		4,095		269		4,095
	$	2,422	$	125,573	$	5,841	$	129,108


*	Land-related charges include land impairments, net realizable value adjustments on land held for sale, impairments of investments in unconsolidated entities, and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue (see Note 2). Other homebuilding consists primarily of write-offs of capitalized interest related to such land-related charges.

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	Operating Data by Segment
	($000's omitted)
	June 30, 2018
	Homes Under Construction		Land Under Development		Raw Land		Total Inventory		Total Assets
Northeast	$	298,241	$	272,358	$	73,577	$	644,176	$	811,067
Southeast	506,116		633,489		78,183		1,217,788		1,355,703
Florida	488,392		879,165		97,481		1,465,038		1,602,996
Midwest	371,665		420,733		28,727		821,125		909,295
Texas	332,420		417,251		88,727		838,398		915,707
West	869,845		1,161,466		143,544		2,174,855		2,357,858
Other homebuilding (a)	55,581		261,153		21,551		338,285		1,389,431
	2,922,260		4,045,615		531,790		7,499,665		9,342,057
Financial Services	—		—		—		—		473,519
	$	2,922,260	$	4,045,615	$	531,790	$	7,499,665	$	9,815,576



	Operating Data by Segment
	($000's omitted)
	December 31, 2017
	Homes Under Construction		Land Under Development		Raw Land		Total Inventory		Total Assets
Northeast	$	234,413	$	327,599	$	73,574	$	635,586	$	791,511
Southeast	433,411		613,626		121,238		1,168,275		1,287,992
Florida	359,651		876,856		109,069		1,345,576		1,481,837
Midwest	299,896		476,694		28,482		805,072		877,282
Texas	251,613		435,018		87,392		774,023		859,847
West	798,706		1,137,940		147,493		2,084,139		2,271,328
Other homebuilding (a)	43,715		268,081		22,663		334,459		1,469,234
	2,421,405		4,135,814		589,911		7,147,130		9,039,031
Financial Services	—		—		—		—		647,618
	$	2,421,405	$	4,135,814	$	589,911	$	7,147,130	$	9,686,649


(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.

4. Debt

Notes payable

Our senior notes are summarized as follows ($000’s omitted):



	June 30, 2018		December 31, 2017
4.250% unsecured senior notes due March 2021 (a)	$	700,000	$	700,000
5.500% unsecured senior notes due March 2026 (a)	700,000		700,000