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 March 31, 2019

[ ] 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 every Interactive Data File required to be submitted 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 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 April 18, 2019: 277,137,113

PULTEGROUP, INC.

TABLE OF CONTENTS



		Page No.
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018	3

	Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018	4

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018	5

	Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2019 and 2018	6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4	Controls and Procedures	44

PART II	OTHER INFORMATION	45

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6	Exhibits	46

	Signatures	47

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PULTEGROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($000’s omitted)



	March 31, 2019		December 31, 2018
	(Unaudited)
ASSETS

Cash and equivalents	$	1,055,457	$	1,110,088
Restricted cash	25,496		23,612
Total cash, cash equivalents, and restricted cash	1,080,953		1,133,700
House and land inventory	7,506,543		7,253,353
Land held for sale	39,431		36,849
Residential mortgage loans available-for-sale	326,995		461,354
Investments in unconsolidated entities	55,725		54,590
Other assets	823,066		830,359
Intangible assets	123,742		127,192
Deferred tax assets, net	250,881		275,579
	$	10,207,336	$	10,172,976

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	444,322	$	352,029
Customer deposits	294,548		254,624
Accrued and other liabilities	1,270,367		1,360,483
Income tax liabilities	18,108		11,580
Financial Services debt	222,139		348,412
Notes payable	3,024,413		3,028,066
	5,273,897		5,355,194
Shareholders' equity	4,933,439		4,817,782
	$	10,207,336	$	10,172,976

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
	March 31,
	2019			2018
Revenues:
Homebuilding
Home sale revenues	$	1,949,856		$	1,911,598
Land sale and other revenues	2,975			12,557
	1,952,831			1,924,155
Financial Services	43,862			45,938
Total revenues	1,996,693			1,970,093

Homebuilding Cost of Revenues:
Home sale cost of revenues	(1,492,791		)	(1,459,940		)
Land sale cost of revenues	(2,050		)	(11,548		)
	(1,494,841		)	(1,471,488		)

Financial Services expenses	(31,449		)	(32,213		)
Selling, general, and administrative expenses	(252,727		)	(240,893		)
Other expense, net	(973		)	(1,308		)
Income before income taxes	216,703			224,191
Income tax expense	(49,946		)	(53,440		)
Net income	$	166,757		$	170,751

Per share:
Basic earnings	$	0.59		$	0.59
Diluted earnings	$	0.59		$	0.59
Cash dividends declared	$	0.11		$	0.09

Number of shares used in calculation:
Basic	277,637			286,683
Effect of dilutive securities	1,003			1,343
Diluted	278,640			288,026

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($000’s omitted)

(Unaudited)



	Three Months Ended
	March 31,
	2019		2018
Net income	$	166,757	$	170,751

Other comprehensive income, net of tax:
Change in value of derivatives	25		21
Other comprehensive income	25		21

Comprehensive income	$	166,782	$	170,772

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(000's omitted)

(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, December 31, 2018	277,110		$	2,771		$	3,201,427	$	(345	)	$	1,613,929		$	4,817,782
Stock option exercises	118		1			1,444		—			—			1,445
Share issuances, net of cancellations	1,337		12			5,792		—			—			5,804
Dividends declared	—		—			—		—			(30,831		)	(30,831		)
Share repurchases	(1,309	)	(13		)	—		—			(35,340		)	(35,353		)
Share-based compensation	—		—			7,810		—			—			7,810
Net income	—		—			—		—			166,757			166,757
Other comprehensive income	—		—			—		25			—			25
Shareholders' Equity, March 31, 2019	277,256		$	2,771		$	3,216,473	$	(320	)	$	1,714,515		$	4,933,439

Shareholders' Equity, December 31, 2017	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	284		3			2,720		—			—			2,723
Share issuances, net of cancellations	783		8			3,477		—			—			3,485
Dividends declared	—		—			—		—			(26,051		)	(26,051		)
Share repurchases	(1,941	)	(20		)	—		—			(59,471		)	(59,491		)
Share-based compensation	—		—			6,782		—			—			6,782
Net income	—		—			—		—			170,751			170,751
Other comprehensive income	—		—			—		21			—			21
Shareholders' Equity, March 31, 2018	285,878		$	2,859		$	3,184,521	$	(424	)	$	1,087,701		$	4,274,657

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)



	Three Months Ended
	March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	166,757		$	170,751
Adjustments to reconcile net income to net cash from operating activities:
Deferred income tax expense	24,690			23,479
Land-related charges	2,979			3,419
Depreciation and amortization	13,210			11,890
Share-based compensation expense	9,019			8,451
Other, net	(39		)	(793		)
Increase (decrease) in cash due to:
Inventories	(259,865		)	(237,169		)
Residential mortgage loans available-for-sale	134,217			185,147
Other assets	64,533			(9,246		)
Accounts payable, accrued and other liabilities	3,408			13,084
Net cash provided by (used in) operating activities	158,909			169,013
Cash flows from investing activities:
Capital expenditures	(16,070		)	(15,428		)
Investments in unconsolidated entities	(1,289		)	(1,000		)
Other investing activities, net	291			452
Net cash provided by (used in) investing activities	(17,068		)	(15,976		)
Cash flows from financing activities:
Repayments of debt	(3,605		)	(451		)
Borrowings under revolving credit facility	—			768,000
Repayments under revolving credit facility	—			(768,000		)
Financial Services borrowings (repayments)	(126,273		)	(190,852		)
Stock option exercises	1,445			2,723
Share repurchases	(35,353		)	(59,491		)
Dividends paid	(30,802		)	(26,347		)
Net cash provided by (used in) financing activities	(194,588		)	(274,418		)
Net increase (decrease) in cash, cash equivalents, and restricted cash	(52,747		)	(121,381		)
Cash, cash equivalents, and restricted cash at beginning of period	1,133,700			306,168
Cash, cash equivalents, and restricted cash at end of period	$	1,080,953		$	184,787

Supplemental Cash Flow Information:
Interest paid (capitalized), net	$	17,164		$	30,109
Income taxes paid (refunded), net	$	(30,850	)	$	631

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”), and title 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, 2018.

Use of estimates

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

Subsequent events

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

Other expense, net

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



	Three Months Ended
	March 31,
	2019			2018
Write-offs of deposits and pre-acquisition costs	$	(2,917	)	$	(2,609	)
Amortization of intangible assets	(3,450		)	(3,450		)
Interest income	4,949			564
Interest expense	(144		)	(143		)
Equity in earnings of unconsolidated entities	37			961
Miscellaneous, net	552			3,369
Total other expense, net	$	(973	)	$	(1,308	)

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 $294.5 million and $254.6 million at March 31, 2019 and December 31, 2018, 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.

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. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when related mortgage payments are received.

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, and related contract assets for estimated future renewal commissions are included in other assets and totaled $31.4 million at March 31, 2019.

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 Accounting Standards Codification ("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
	March 31,
	2019			2018
Numerator:
Net income	$	166,757		$	170,751
Less: earnings distributed to participating securities	(308		)	(296		)
Less: undistributed earnings allocated to participating securities	(1,410		)	(1,622		)
Numerator for basic earnings per share	$	165,039		$	168,833
Add back: undistributed earnings allocated to participating securities	1,410			1,622
Less: undistributed earnings reallocated to participating securities	(1,407		)	(1,614		)
Numerator for diluted earnings per share	$	165,042		$	168,841

Denominator:
Basic shares outstanding	277,637			286,683
Effect of dilutive securities	1,003			1,343
Diluted shares outstanding	278,640			288,026

Earnings per share:
Basic	$	0.59		$	0.59
Diluted	$	0.59		$	0.59

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, 2019 and December 31, 2018, residential mortgage loans available-for-sale had an aggregate fair value of $327.0 million and $461.4 million, respectively, and an aggregate outstanding principal balance of $315.5 million and $444.2 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(1.1) million and $(0.1) million for the three months ended March 31, 2019 and 2018, 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 $24.0 million and $27.0 million for the three months ended March 31, 2019 and 2018, respectively, and are 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, 2019 and December 31, 2018, we had aggregate IRLCs of $356.9 million and $285.0 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, 2019 and December 31, 2018, we had unexpired forward contracts of $498.0 million and $511.0 million, respectively, and whole loan investor commitments of $146.4 million and $187.8 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.

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



	March 31, 2019				December 31, 2018
	Other Assets		Accrued and Other Liabilities		Other Assets		Accrued and Other Liabilities
Interest rate lock commitments	$	11,629	$	297	$	9,196	$	161
Forward contracts	234		4,107		315		7,229
Whole loan commitments	329		614		393		1,111
	$	12,192	$	5,018	$	9,904	$	8,501

New accounting pronouncements

On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) and related amendments using a modified retrospective approach with an effective date as of January 1, 2019. Prior year financial statements were not recast under the new standard and, therefore, have not been reflected as such on our balance sheet. ASU 2016-02 requires leases with durations greater than 12 months to be recorded on the balance sheet. We elected the package of transition practical expedients, which allowed us to carryforward our historical assessment of (1) whether contracts are or contain leases, (2) lease classification, and (3) initial direct costs. The adoption of ASU 2016-02 had no impact on retained earnings. See Note 8 “Leases” for additional information about this adoption.

On January 1, 2018, we adopted ASC 606, "Revenue from Contracts with Customers", which 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, and there were no significant changes to our business processes, systems, or internal controls as a result of implementing the standard.

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", 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. The standard 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", which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard, goodwill impairment will now be determined by evaluating the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The standard is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We do not expect the standard to have a material impact on our financial statements.

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

2. Inventory

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



	March 31, 2019		December 31, 2018
Homes under construction	$	2,892,328	$	2,630,158
Land under development	4,161,168		4,129,225
Raw land	453,047		493,970
	$	7,506,543	$	7,253,353

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,
	2019			2018
Interest in inventory, beginning of period	$	227,495		$	226,611
Interest capitalized	42,381			43,960
Interest expensed	(34,563		)	(30,558		)
Interest in inventory, end of period	$	235,313		$	240,013

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 March 31, 2019 or December 31, 2018 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 March 31, 2019 and December 31, 2018 ($000’s omitted):



	March 31, 2019				December 31, 2018
	Deposits and Pre-acquisition Costs		Remaining Purchase Price		Deposits and Pre-acquisition Costs		Remaining Purchase Price
Land options with VIEs	$	99,742	$	1,073,520	$	90,717	$	1,079,507
Other land options	138,597		1,561,597		127,851		1,522,903
	$	238,339	$	2,635,117	$	218,568	$	2,602,410

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, Pennsylvania, Virginia
Southeast:		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida
Midwest:		Illinois, Indiana, Kentucky, Michigan, Minnesota, 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
	March 31,
	2019			2018
Revenues:
Northeast	$	110,492		$	132,436
Southeast	375,417			374,623
Florida	396,443			348,709
Midwest	293,590			297,506
Texas	269,003			246,638
West	507,886			524,243
	1,952,831			1,924,155
Financial Services	43,862			45,938
Consolidated revenues	$	1,996,693		$	1,970,093

Income (loss) before income taxes:
Northeast	$	7,928		$	9,312
Southeast	37,856			40,457
Florida	49,596			44,945
Midwest	26,158			28,401
Texas	30,971			30,536
West	90,182			89,205
Other homebuilding (a)	(38,397		)	(32,498		)
	204,294			210,358
Financial Services	12,409			13,833
Consolidated income before income taxes	$	216,703		$	224,191


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

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	Operating Data by Segment ($000’s omitted)
	Three Months Ended
	March 31,
	2019		2018
Land-related charges*:
Northeast	$	324	$	1,185
Southeast	572		1,042
Florida	481		183
Midwest	1,103		746
Texas	68		50
West	431		213
Other homebuilding	—		—
	$	2,979	$	3,419


*	Land-related charges include land impairments, net realizable value adjustments on land held for sale and write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue.



	Operating Data by Segment
	($000's omitted)
	March 31, 2019
	Homes Under Construction		Land Under Development		Raw Land		Total Inventory		Total Assets
Northeast	$	328,021	$	296,198	$	25,513	$	649,732	$	738,662
Southeast	462,382		676,532		89,750		1,228,664		1,372,245
Florida	514,551		926,254		76,340		1,517,145		1,675,802
Midwest	313,244		431,144		29,151		773,539		861,452
Texas	326,344		436,409		95,942		858,695		936,709
West	896,861		1,126,206		118,589		2,141,656		2,376,073
Other homebuilding (a)	50,925		268,425		17,762		337,112		1,801,106
	2,892,328		4,161,168		453,047		7,506,543		9,762,049
Financial Services	—		—		—		—		445,287
	$	2,892,328	$	4,161,168	$	453,047	$	7,506,543	$	10,207,336

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



	Operating Data by Segment
	($000's omitted)
	December 31, 2018
	Homes Under Construction		Land Under Development		Raw Land		Total Inventory		Total Assets
Northeast	$	268,900	$	291,467	$	52,245	$	612,612	$	704,515
Southeast	443,140		676,087		90,332		1,209,559		1,347,427
Florida	467,625		892,669		85,321		1,445,615		1,601,906
Midwest	314,442		433,056		29,908		777,406		849,596
Texas	284,405		427,124		98,415		809,944		881,629
West	805,709		1,131,841		118,579		2,056,129		2,208,092
Other homebuilding (a)	45,937		276,981		19,170		342,088		2,006,825
	2,630,158		4,129,225		493,970		7,253,353		9,599,990
Financial Services	—		—		—		—		572,986
	$	2,630,158	$	4,129,225	$	493,970	$	7,253,353	$	10,172,976


(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):



	March 31, 2019			December 31, 2018
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
5.000% unsecured senior notes due January 2027 (a)	600,000			600,000
7.875% unsecured senior notes due June 2032 (a)	300,000			300,000
6.375% unsecured senior notes due May 2033 (a)	400,000			400,000
6.000% unsecured senior notes due February 2035 (a)	300,000			300,000
Net premiums, discounts, and issuance costs (b)	(13,295		)	(13,247		)
Total senior notes	2,986,705			2,986,753
Other notes payable	37,708			41,313
Notes payable	$	3,024,413		$	3,028,066
Estimated fair value	$	3,091,068		$	2,899,143


(a)	Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.


(b)	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.

Other notes payable include non-recourse and limited recourse collateralized notes with third parties that totaled $37.7 million and $41.3 million at March 31, 2019 and December 31, 2018, respectively. These notes have maturities ranging up to three years, are secured by the applicable land positions to which they relate, and have no recourse to any other assets. The stated interest rates on these notes range up to 5.17%.

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Revolving credit facility

In June 2018, we entered into the Second Amended and Restated Credit Agreement ("Revolving Credit Facility") which replaced the Company's previous credit agreement. The Revolving Credit Facility contains substantially similar terms to the previous credit agreement and extended the maturity date from June 2019 to June 2023. The Revolving Credit Facility has a maximum borrowing capacity of $1.0 billion and contains an uncommitted accordion feature that could increase the capacity to $1.5 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 $500.0 million at March 31, 2019. 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 therein. We had no borrowings outstanding at March 31, 2019 and December 31, 2018, and $232.9 million and $239.4 million of letters of credit issued under the Revolving Credit Facility at March 31, 2019 and December 31, 2018, 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, 2019, we were in compliance with all covenants. Our available and unused borrowings

under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $767.1 million and $760.6 million at March 31, 2019 and December 31, 2018, respectively.

Joint venture debt

At March 31, 2019, aggregate outstanding debt of unconsolidated joint ventures was $35.2 million, of which $34.4 million was related to one joint venture in which we have a 50% interest. In connection with this loan, we and our joint venture partner provided customary limited recourse guaranties under which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding. The limited guaranties include, but are not limited to: (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.

Financial Services debt

Pulte Mortgage maintains a master repurchase agreement (the "Repurchase Agreement") with third party lenders that matures in August 2019. The maximum aggregate commitment was $350.0 million at March 31, 2019 and continues through maturity. 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 $222.1 million and $348.4 million outstanding under the Repurchase Agreement at March 31, 2019 and December 31, 2018, 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, 2019, we declared cash dividends totaling $30.8 million and repurchased 0.9 million shares under our repurchase authorization for $25.0 million. For the three months ended March 31, 2018, we declared cash dividends totaling $26.1 million and repurchased 1.7 million shares under our repurchase authorization for $52.5 million. At March 31, 2019, we had remaining authorization to repurchase $274.9 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, 2019 and 2018, participants surrendered shares valued at $10.4 million and $7.0 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. Income taxes

Our effective tax rate for the three months ended March 31, 2019 was 23.0%, compared to 23.8% for the same period in 2018. Our effective tax rate differed from the federal statutory rate primarily due to state income tax expense on current year earnings, tax benefits for equity compensation, and the favorable resolution of certain state income tax matters. Our effective tax rate for the three months ended March 31, 2019 is lower than the prior year period primarily due to the favorable resolution of certain state income tax matters.

At March 31, 2019 and December 31, 2018, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $250.9 million and $275.6 million, 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. We had $22.4 million and $30.6 million of gross unrecognized tax benefits at March 31, 2019 and December 31, 2018, respectively. Additionally, we had accrued interest and penalties of $5.8 million at both March 31, 2019 and December 31, 2018. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $8.4 million, excluding interest and penalties, primarily due to potential audit settlements.

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):

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



Financial Instrument	Fair Value Hierarchy	Fair Value
Financial Instrument	Fair Value Hierarchy	March 31, 2019			December 31, 2018

Measured at fair value on a recurring basis:
Residential mortgage loans available-for-sale	Level 2	$	326,995		$	461,354
Interest rate lock commitments	Level 2	11,332			9,035
Forward contracts	Level 2	(3,873		)	(6,914		)
Whole loan commitments	Level 2	(285		)	(718		)

Measured at fair value on a non-recurring basis:
House and land inventory	Level 3	$	—		$	18,253
Land held for sale	Level 2	1,330			17,813

Disclosed at fair value:
Cash, cash equivalents, and restricted cash	Level 1	$	1,080,953		$	1,133,700
Financial Services debt	Level 2	222,139			348,412
Other notes payable	Level 2	37,708			41,313
Senior notes payable	Level 2	3,053,360			2,857,830

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, and 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.

The carrying amounts of cash and equivalents, Financial Services debt, and other notes payable approximate their fair values due to their short-term nature and/or 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 $3.0 billion at both March 31, 2019 and December 31, 2018.

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. In addition, certain trustees and investors continue to attempt to collect damages based on losses from loans that originated prior to 2009. Some of our mortgage subsidiaries are currently defendants in litigation related to such claims. If a loan is determined to be faulty, we either indemnify the investor for potential future losses, repurchase the loan from the investor, or reimburse the investor's actual losses.

CTX Mortgage Company, LLC ("CTX Mortgage") was the mortgage subsidiary of Centex and ceased originating loans in December 2009. In the matter Lehman Brothers Holdings, Inc. ("Lehman") in the U.S. Bankruptcy Court in the Southern District of New York, Lehman has initiated an adversary proceeding against CTX Mortgage seeking indemnity for loans sold to

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

it by CTX Mortgage prior to 2009. This claim is part of a broader action by Lehman in U.S. Bankruptcy Court against more than 100 mortgage originators and brokers. On August 13, 2018, the court denied a motion to dismiss filed by CTX Mortgage and other defendants, and on December 17, 2018, Lehman filed an amended adversary complaint against CTX Mortgage. Lehman's complaint alleges claims for indemnifiable losses of up to $261 million due from CTX Mortgage. We believe that CTX Mortgage has meritorious defenses and CTX Mortgage will continue to vigorously defend itself in this matter. We have recorded a liability for an amount that we consider to be the best estimate within a range of potential losses.

In addition, both CTX Mortgage and Pulte Mortgage sold certain loans originated prior to 2009 to financial institutions that were subsequently included in residential mortgage-backed securities or other securitizations issued by such financial institutions. In connection with such sales, CTX Mortgage and Pulte Mortgage have been put on notice of potential direct and / or third-party claims for indemnification arising out of litigation relating to certain of these residential mortgage-backed securities or other securitizations. Neither CTX Mortgage nor Pulte Mortgage is named as a defendant in these actions. We cannot yet quantify CTX Mortgage's or Pulte Mortgage's potential liability as a result of these indemnification obligations. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or cash flows of the Company.

Our recorded liabilities for all such claims decreased from $50.3 million at December 31, 2018 to $25.5 million at March 31, 2019 as the result of funding previously settled claims. 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.

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 $232.9 million and $1.3 billion, respectively, at March 31, 2019 and $239.4 million and $1.3 billion, respectively, at December 31, 2018. 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. 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. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be drawn.

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

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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,
	2019			2018
Warranty liabilities, beginning of period	$	79,154		$	72,709
Reserves provided	12,262			11,916
Payments	(16,130		)	(14,282		)
Other adjustments	4,461			643
Warranty liabilities, end of period	$	79,747		$	70,986

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 us 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 our 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 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 $729.2 million and $737.0 million at March 31, 2019 and December 31, 2018, respectively, the vast majority of which relate to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 66% and 65% of the total general liability reserves at March 31, 2019 and December 31, 2018, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 can be volatile, 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 typically 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,
	2019			2018
Balance, beginning of period	$	737,013		$	758,812
Reserves provided	17,396			19,660
Adjustments to previously recorded reserves	(3,875		)	2,461
Payments, net (a)	(21,364		)	(9,829		)
Balance, end of period	$	729,170		$	771,104


(a)	Includes net changes in amounts expected to be recovered from our insurance carriers, which are recorded in 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 $128.0 million and $153.0 million at March 31, 2019 and December 31, 2018, 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, 2019, we wrote-off $11.6 million of insurance receivables in connection with the settlement of an arbitration with one of our carriers, pursuant to which we received the majority of the coverage under the policy.

Leases

We lease certain office space and equipment for use in our operations. We recognize lease expense for these leases on a straight-line basis over the lease term and combine lease and non-lease components for all leases. Right-of-use ("ROU") assets and lease liabilities are recorded on the balance sheet for all leases with an expected term of at least one year. Some leases include one or more options to renew. The exercise of lease renewal options is generally at our discretion. The depreciable lives of ROU assets and leasehold improvements are limited to the expected lease term. Certain of our lease agreements include rental payments based on a pro-rata share of the lessor’s operating costs which are variable in nature. Our lease agreements do not contain any residual value guarantees or material restrictive covenants.

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

ROU assets are classified within other assets on the balance sheet, while lease liabilities are classified within accrued and other liabilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet. ROU assets and lease liabilities were $73.3 million and $98.5 million at March 31, 2019, respectively. During the three months ended March 31, 2019, we obtained an additional $7.8 million of ROU assets under operating leases. Payments on lease liabilities during the three months ended March 31, 2019 totaled $5.8 million.

Lease expense includes costs for leases with terms in excess of one year as well as short-term leases with terms of less than one year. For the three months ended March 31, 2019, our total lease expense was $8.8 million, which includes variable lease costs of $1.7 million. Short-term lease costs and external sublease income are de minimis.

The future minimum lease payments required under our leases as of March 31, 2019 are as follows ($000's omitted):



Years Ending December 31,
2019 (a)	$	17,903
2020	20,548
2021	18,262
2022	16,690
2023	15,085
Thereafter	$	30,381
Total lease payments (b)	118,869
Less: Interest (c)	20,407
Present value of lease liabilities (d)	$	98,462


(a)	Remaining payments are for the nine-months ending December 31, 2019.


(b)	Lease payments include options to extend lease terms that are reasonably certain of being exercised. There were no legally binding minimum lease payments for leases signed but not yet commenced at March 31, 2019.


(c)	Our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our discount rate for such leases to determine the present value of lease payments at the lease commencement date.


(d)	The weighted average remaining lease term and weighted average discount rate used in calculating our lease liabilities were 6.3 years and 5.8%, respectively, at March 31, 2019.

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.

PULTEGROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2019

($000’s omitted)



	Unconsolidated						Eliminating Entries	Consolidated PulteGroup, Inc.
	PulteGroup, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries	Consolidated PulteGroup, Inc.
ASSETS
Cash and equivalents	$	—	$	1,009,042	$	46,415	$