10-K 1 phm-12312011x10k.htm FORM 10-K phm-12.31.2011-10K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9804 
_______________________________________________________________________
PULTEGROUP, INC.
(Exact name of registrant as specified in its charter) 
MICHIGAN
 
38-2766606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Bloomfield Hills Parkway, Suite 300
Bloomfield Hills, Michigan 48304
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248) 647-2750
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01
 
New York Stock Exchange
PulteGroup, Inc. 7.375% Senior Notes due 2046
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  [X]  NO  [ ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   YES [ ]  NO  [X]
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). Act.  YES  [X]  NO  [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [X]            Accelerated filer [ ]             Non-accelerated filer [ ]            Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES [ ]  NO  [X]
The aggregate market value of the registrant’s voting stock held by nonaffiliates of the registrant as of June 30, 2011, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $2,903,926,649.
As of February 1, 2012, the registrant had 382,607,543 shares of common stock outstanding.
Documents Incorporated by Reference
Applicable portions of the Proxy Statement for the 2012 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form.



PULTEGROUP, INC.
TABLE OF CONTENTS
 
Item
No.
 
Page
No.
 
 
 
 
 
1
 
 
 
1A
 
 
 
1B
 
 
 
2
 
 
 
3
 
 
 
4
 
 
 
4A
 
 
 
 
 
 
 
 
5
 
 
 
6
 
 
 
7
 
 
 
7A
 
 
 
8
 
 
 
9
 
 
 
9A
 
 
 
9B
 
 
 
 
 
 
 
 
10
 
 
 
11
 
 
 
12
 
 
 
13
 
 
 
14
 
 
 
 
 
 
 
 
15
 
 
 
 
 


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PART I

ITEM I.     BUSINESS
PulteGroup, Inc.
PulteGroup, Inc. is a Michigan corporation organized in 1956. We are one of the largest homebuilders in the United States, and our common stock trades on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also have mortgage banking operations, conducted principally through Pulte Mortgage LLC (“Pulte Mortgage”), and title operations.
On August 18, 2009, we completed the acquisition of Centex Corporation (“Centex”) through the merger of PulteGroup’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among PulteGroup, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of PulteGroup. Accordingly, the results of Centex are included in our consolidated financial statements from the date of the merger.
Homebuilding, our core business, includes the acquisition and development of land primarily for residential purposes within the United States and the construction of housing on such land. Homebuilding offers a broad product line to meet the needs of home buyers in our targeted markets. Through our brands, which include Pulte Homes, Del Webb, and Centex, we offer a wide variety of home designs, including single-family detached, townhouses, condominiums, and duplexes at different prices and with varying levels of options and amenities to our major customer segments: entry-level, move-up, and active adult. Over our history, we have delivered nearly 600,000 homes.
As of December 31, 2011, we conducted our operations in 61 markets located throughout 29 states. During 2011, we realigned our organizational structure and reportable segment presentation. Accordingly, the segment information provided herein has been reclassified to conform to the current presentation for all periods presented.
 
Northeast:
  
Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania,
Rhode Island, Virginia
Southeast:
  
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Texas:
 
Texas
North:
  
Illinois, Indiana, Michigan, Minnesota, Missouri, Northern California, Ohio, Oregon, Washington
Southwest:
  
Arizona, Colorado, Hawaii, Nevada, New Mexico, Southern California
We also have one reportable segment for our financial services operations, which consist principally of mortgage banking and title operations. Our Financial Services segment operates generally in the same geographic markets as our Homebuilding segments.
Financial information for each of our reportable business segments is included in Note 6 to our Consolidated Financial Statements.
Available information
Our internet website address is www.pultegroupinc.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers, our code of ethical business conduct, our corporate governance guidelines, and the charters of the Audit, Compensation and Management Development, Nominating and Governance, and Finance and Investment committees of our Board of Directors are also posted on our website and are available in print, free of charge, upon request.


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Homebuilding Operations
 
Years Ended December 31,
($000’s omitted)
 
2011
 
2010
 
2009
 
2008
 
2007
Home sale revenues
$
3,950,743

 
$
4,419,812

 
$
3,869,297

 
$
5,980,289

 
$
8,881,509

Home closings
15,275

 
17,095

 
15,013

 
21,022

 
27,540

Since early 2006, the U.S. housing market has been unfavorably impacted by severe weakness in new home sales attributable to, among other factors, weak consumer confidence, tightened mortgage standards, significant foreclosure activity, a more challenging appraisal environment, increased unemployment levels, and significant uncertainty in the global economy. These conditions have contributed to sharply weakened demand for new homes and heightened pricing pressures on new and existing home sales. New home sales in the U.S. declined to 302,000 new home sales in 2011, which represents the lowest level since at least 1962 and a decline of approximately 77% from the 2005 peak of 1.3 million new home sales. We have experienced significant net losses in each year between 2007 - 2011, resulting from a combination of reduced operational profitability and significant asset impairments.
In response to these market conditions, we have made significant reductions in employee headcount and overhead costs, including a series of consolidations of our local operating divisions and corporate functions. We also significantly curtailed our investments in inventory, implemented a more rigorous risk-based approach to land investment, and liquidated certain of our less strategic land positions. We are seeking to better align the size and features of our homes with the current demand environment and achieve significant reductions in house cost by value-engineering our floor plans to improve the efficiency of construction, rebidding supplier contracts and working with suppliers to find cost savings, and focusing on lean production principles. In recent years, we generated significant positive cash flow primarily through refunds of income taxes paid in prior years combined with limiting the level of reinvestment into inventory. We have used this positive cash flow to, among other things, increase our cash reserves as well as retire outstanding debt. Through the combination of these operational and capital structure activities, we have positioned the company for future profitability, even at the current low industry volumes.
In the long-term, we continue to believe that the national publicly-traded builders will have a competitive advantage over local builders through their ability to leverage economies of scale, access to more reliable and lower cost financing through the capital markets, ability to control and entitle large land positions, and greater geographic and product diversification. Among the national publicly-traded peer group, we believe that builders with more significant land positions, broad geographic and product diversity, and sustainable capital positions will benefit as market conditions recover. In the short-term, we expect that market conditions will remain challenging. Our strategy to enhance shareholder value is centered around the following operational objectives:
Revenue enhancement by establishing clear business models for each of our brands based on systematic, consumer-driven input, optimizing our pricing through the expanded use of options and lot premiums, and lessening our reliance on "speculative" home sales (homes for which construction began prior to a customer order and which generally result in lower margins than pre-sold homes);
Reducing our house costs through common house plan management, value-engineering our house plans, working with suppliers to reduce costs, and following lean production principles;
Maintaining an efficient overhead structure; and
Improving our inventory turns.
As of December 31, 2011, our Homebuilding operations offered homes for sale in approximately 700 communities. Sales prices of unit closings during 2011 ranged from less than $100,000 to greater than $900,000, with 88% falling within the range of $100,000 to $400,000. The average unit selling price in 2011 was $259,000, compared with $259,000 in 2010, $258,000 in 2009, $284,000 in 2008, and $322,000 in 2007. The significant decrease in the average selling price of our homes since 2007 resulted from a combination of pricing pressures due to challenging industry conditions, changes in the geographic mix of homes closed, adjusting our product offerings to better align with current market conditions, and an increase in the mix of entry-level buyers as the result of the Centex merger.

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Sales of single-family detached homes, as a percentage of total unit sales, were 79% in 2011, compared with 79% in 2010, 77% in 2009, 75% in 2008, and 74% in 2007. The increase in the percentage of single-family detached homes can be attributed to a weakened demand for townhouses, condominiums, and other attached housing, as prices for detached new homes have become more affordable for entry-level and active adult homebuyers.
Our Homebuilding operations are geographically diverse and, as a result, help to insulate us from demand changes in individual markets. Since 2006, however, such diversification has not insulated us from demand changes due to the nationwide downturn in the homebuilding industry that has had a significant adverse impact on our operations in each of our markets.
Ending backlog, which represents orders for homes that have not yet closed, was $1.1 billion (3,924 units) at December 31, 2011 and $1.1 billion (3,984 units) at December 31, 2010. For each order in backlog, we have received a signed customer contract and the required customer deposit, which is refundable in certain instances. Of the orders in backlog at December 31, 2011, substantially all are scheduled to be closed during 2012, though all orders are subject to potential cancellation by or final negotiations with the customer. In the event of cancellation, the majority of our sales contracts stipulate that we have the right to retain the customer’s deposit, though we may choose to refund the deposit in certain instances.
Land acquisition and development
We acquire land primarily for the construction of our homes for sale to homebuyers, though we periodically sell select parcels of land to third parties for commercial or other development. Additionally, we may determine that certain land assets no longer fit into our strategic operating plans. We select locations for development of homebuilding communities after completing a feasibility study, which includes, among other things, soil tests, independent environmental studies and other engineering work, an evaluation of the necessary zoning and other governmental entitlements, and extensive market research that enables us to match the location with our product offering to targeted consumer groups. We consider factors such as proximity to developed areas, population and job growth patterns and, if applicable, estimated development costs. We frequently manage a portion of the risk of controlling our land positions through the use of option contracts. We typically acquire land with the intent to complete sales of housing units within 24 to 36 months from the date of opening a community, except in the case of certain Del Webb active adult developments and other large master-planned projects for which the completion of community build-out requires a longer time period. As a result of the downturn in the homebuilding industry that began in 2006, however, our supply of controlled land is in excess of our short-term needs in many of our markets.
Land is generally purchased after it is properly zoned and developed or is ready for development. In the normal course of business, we dispose of owned land not required by our homebuilding operations through sales to appropriate end users. Where we develop land, we engage directly in many phases of the development process, including land and site planning, and obtaining environmental and other regulatory approvals, as well as constructing roads, sewers, water and drainage facilities, and community amenities, such as parks, pools, and clubhouses. We use our staff and the services of independent engineers and consultants for land development activities. Land development work is performed primarily by independent contractors and local government authorities who construct sewer and water systems in some areas. At December 31, 2011, we controlled 131,010 lots, of which 116,933 were owned and 14,077 were under option agreements.
Sales and marketing
We are dedicated to improving the quality and value of our homes through innovative architectural and community designs. Analyzing various qualitative and quantitative data obtained through extensive market research, we segment our potential customers into well-defined buyer groups. Segmentation analysis provides a method for understanding the business opportunities and risks across the full spectrum of consumer groups in each market. Once the demands of potential buyers are understood, we link our home design and community development efforts to the specific lifestyle of each targeted consumer group. Through our portfolio of brands, each serving unique customer segments, we are able to provide a distinct experience to potential customers:

Centex
Pulte Homes
Del Webb
Targeted customer segment
Entry-level buyers
Move-up buyers
Active adults
Portion of 2011 home closings
36%
36%
28%
Our Centex brand is targeted to entry-level buyers, and these communities tend to be smaller with product offerings geared toward lower average selling prices. The move-up buyers in our Pulte Homes communities tend to place more of a premium on location and amenities. These communities typically offer larger homes at higher price points. Through our Del Webb brand, we are better able to address the needs of active adults. Our Del Webb brand offers both destination communities

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and “in place” communities, for those buyers who prefer to remain in their current geographic area. These highly amenitized communities offer a variety of features, including golf courses, recreational centers, and educational classes, to the age fifty-five and over buyer to maintain an active lifestyle. In order to make the cost of these highly amenitized communities affordable to the individual homeowner, Del Webb communities tend to be very large, consisting in some cases of several thousand homes, and have longer life cycles, in some cases extending beyond 10 years.
We introduce our homes to prospective buyers through media advertising, illustrated brochures, Internet listings and link placements, mobile applications, and other advertising displays. We have made significant enhancements in our tools and business practices to adapt our selling efforts to today's mobile customers. In addition, our websites, www.pulte.com, www.delwebb.com, and www.centex.com, provide tools to help users find a home that meets their needs, investigate financing alternatives, communicate moving plans, maintain a home, learn more about us, and communicate directly with us. Approximately 6.7 million people visited our websites during 2011.
To meet the demands of our various customers, we have established design expertise for a wide array of product lines. We believe that we are an innovator in home design, and we view our design capabilities as an integral aspect of our marketing strategy. Our in-house architectural services teams and management, supplemented by outside consultants, create distinctive design features, both in exterior facades and interior options and features. We typically offer a variety of potential options and upgrades, such as different flooring, countertop, and appliance choices, and design our base house and option packages to meet the needs of our customers as defined through rigorous market research. Energy efficiency represents an important source of value for new homes compared to existing homes and represents a key area of focus for our home designs, including high efficiency HVAC systems and insulation, low-emissivity windows, solar power in certain geographies, and other energy-efficient features.
Typically, our sales teams, together with outside sales brokers, are responsible for guiding the customer through the sales process. We are committed to industry-leading customer service through a variety of quality initiatives, including our customer care program, which ensures that homeowners are comfortable at every stage of the building process. Fully furnished and landscaped model homes are used to showcase our homes and their distinctive design features.
Construction
The construction of our homes is conducted under the supervision of our on-site construction field managers. Substantially all of our construction work is performed by independent subcontractors under contracts that, in many instances, cover both labor and materials on a fixed-price basis. Using a selective process, we have teamed up with what we believe are premier subcontractors and suppliers to improve all aspects of the house construction process.
Continuous improvement in our house construction process is a key area of focus. We maintain efficient construction operations by using standard materials and components from a variety of sources and utilizing standard construction practices, including lean production principles. We also use component off-site manufacturing methods for certain portions of the construction process to provide high efficiency, high quality, and lower cost products to our customers. During 2011, we began a more intensive effort to improve our product offerings and production processes through the following programs:
New product development to introduce new features and technologies based on customer validated data.
Common management of house plans in order to focus on building those house designs that customers value the most and that can be built at the highest quality and an efficient cost.
Value engineering our house plans to optimize house designs in terms of material content and ease of constructability while still providing a clear value to the consumer. Value engineering eliminates items that add cost but that have little to no value to the customer.
Working with our suppliers to establish the "should cost", a data driven, collaborative effort to reduce construction costs to what the associated construction activities or materials “should cost” in the market.
We cannot determine the extent to which necessary building materials will be available at reasonable prices in the future. While the availability of materials and labor is not a significant concern under current market conditions, we have, on occasion, experienced shortages of skilled labor in certain trades and of building materials in some markets in previous years. Additionally, the cost of certain building materials, especially lumber, steel, concrete, copper, and petroleum-based materials, is influenced by changes in global commodity prices. To minimize the effects of changes in construction costs, the contracting and purchasing of building supplies and materials generally is negotiated at or near the time when related sales contracts are signed. In addition, we leverage our size by actively negotiating certain materials on a national or regional basis to minimize production component cost. We are also working to establish a more integrated system that can effectively link suppliers, contractors, and the production schedule through various strategic business partnerships and e-business initiatives.

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Competition
The housing industry in the United States is fragmented and highly competitive. While we are one of the largest homebuilders in the U.S., our national market share represented only 5% of new home sales in 2011. In each of our local markets, there are numerous homebuilders with which we compete. We also compete with sales of existing house inventory, and any provider of housing units, for sale or to rent, including apartment operators, may be considered a competitor. Conversion of apartments to condominiums further provides certain segments of the population an alternative to traditional housing, as does manufactured housing. We compete primarily on the basis of location, price, quality, reputation, design, community amenities, and our customers' overall sales and homeownership experiences.
Seasonality
Our homebuilding operating cycle historically reflected increased revenues and cash flow from operations during the fourth quarter based on the timing of home closings. However, the challenging market conditions experienced since early 2006 have lessened the seasonal variations of our results. During 2011, we experienced a return to a somewhat more traditional demand pattern as new orders were higher in the first half of the year and home closings increased in each quarter throughout the year. However, given the current significant uncertainty in the homebuilding industry, we can make no assurances as to when and to what degree our historical seasonality will recur.
Regulation and environmental matters
Our operations are subject to extensive regulations imposed and enforced by various federal, state, and local governing authorities. These regulations are complex and include building codes, land zoning and other entitlement restrictions, health and safety regulations, labor practices, marketing and sales practices, environmental regulations, rules and regulations relating to mortgage financing operations, and various other laws, rules, and regulations. Collectively, these regulations have a significant impact on the site selection and development of our communities, our house design and construction techniques, our relationships with customers, employees, and suppliers / subcontractors, and many other aspects of our business. The applicable governing authorities frequently have broad discretion in administering these regulations, including inspections of our homes prior to closing with the customer in the majority of municipalities in which we operate.
In addition to existing regulations, more stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance. On December 1, 2009, the Environmental Protection Agency (“EPA”) promulgated new regulations regarding effluent limitation guidelines (“ELG”) for discharges from construction and development sites. The new regulations require all construction sites subject to National Pollutant Discharge Elimination System construction storm water permits issued by the EPA or an authorized state to implement certain sediment and erosion controls and pollution prevention measures. These regulations also require sampling of storm water discharges and compliance with a numeric effluent limitation of 280 nephelometric turbidity units (“NTUs”) beginning August 1, 2011 for sites disturbing 20 or more acres at once and beginning February 2, 2014 for sites disturbing 10 or more acres at once.  Effective January 4, 2011, the effluent limitation standard of 280 NTUs has been stayed by the EPA until it can complete a new rulemaking to correct the numeric limitation.  The numeric limit is the only portion of the new regulations that has been stayed by the EPA.  The EPA published a Federal Register notice on January 3, 2012 requesting additional data on the performance of technologies in controlling turbidity in stormwater discharges from construction sites. Comments will be accepted for sixty days.  No date has yet been set by EPA for further rulemaking related to ELG.
In addition to the new ELG regulations, the EPA also announced that it is committed to and has begun a rulemaking to address post-construction storm water discharges from newly developed and redeveloped sites. This rulemaking is expected to be completed by November 2012. There can be no assurance whether the EPA will adopt final rules regarding post-construction storm water discharges, or, if it does, the form the final rules will take. We are currently assessing the impact that the new ELG rules and potential post-construction rules will have on our business and results of operations.

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Financial Services Operations
We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. Pulte Mortgage arranges financing through the origination of mortgage loans primarily for the benefit of our homebuyers. We are a lender approved by the FHA and VA and are a seller/servicer approved by Government National Mortgage Association (“GNMA” or "Ginnie Mae"), Federal National Mortgage Association (“FNMA” or "Fannie Mae"), Federal Home Loan Mortgage Corporation (“FHLMC” or "Freddie Mac"), and other investors. In our conventional mortgage lending activities, we follow underwriting guidelines established by Fannie Mae, Freddie Mac, and private investors. We believe that our customers’ use of our in-house mortgage and title operations provides us with a competitive advantage by enabling more control over the quality of the overall home buying process for our customers while also helping us align the timing of the house construction process with our customers’ financing needs.
During 2011, 2010, and 2009, we originated mortgage loans for 62%, 63%, and 70%, respectively, of the homes we sold. Such originations represented substantially all of our total originations in each of those years as the primary purpose for our mortgage operations is to support our homebuilding business. Our capture rate, which we define as loan originations from our homebuilding business as a percentage of total loan opportunities from our homebuilding business excluding cash settlements, was 78.5% in 2011, 77.5% in 2010, and 85.3% in 2009.
In originating mortgage loans, we initially use our own funds and subsequently sell such mortgage loans to outside investors. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination.
We sell the servicing rights for the loans we originate on a flow basis through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time. The servicing sales contracts provide for the reimbursement of payments made when loans prepay within specified periods of time, usually 90 to 120 days after sale.
The mortgage industry in the United States is highly competitive. We compete with other mortgage companies and financial institutions to provide attractive mortgage financing to our homebuyers. We utilize a centralized fulfillment center staffed with loan consultants to perform our mortgage underwriting, processing and closing functions. We believe centralizing both the fulfillment and origination of our loans improves the speed, efficiency, consistency, and quality of our mortgage operations, improving our profitability and allowing us to focus on providing attractive mortgage financing opportunities for our customers.
In originating and servicing mortgage loans, we are subject to the rules and regulations of the government-sponsored investors, and other investors, that purchase the loans we originate. In addition to being affected by changes in these programs, our mortgage banking business is also affected by many of the same factors that impact our homebuilding business.
Our mortgage operations are also subject to potential losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If determined to be at fault, we either repurchase the loans from the investors or reimburse the investors' losses (a "make-whole" payment). Historically, losses related to these representations were not significant. Beginning in 2009, we experienced a significant increase in losses as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to us. To date, the significant majority of these losses relates to loans originated in 2006 and 2007, during which period inherently riskier loan products became more common in the mortgage origination market. Given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, it is reasonably possible that future losses may exceed our current estimates.
Our subsidiary title insurance companies serve as title insurance agents in select markets by providing title insurance policies and examination and closing services to buyers of homes we sell. We have only limited risk associated with our title operations due to the low incidence of claims related to underwriting risk associated with issued title insurance policies and fiduciary risk resulting from closing services.

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Financial Information About Geographic Areas
Substantially all of our operations are located within the United States. However, we have some non-operating foreign subsidiaries and affiliates, which are insignificant to our consolidated financial results.
Organization/Employees
All subsidiaries and operating units operate independently with respect to daily operations. Homebuilding real estate purchases and other significant homebuilding, mortgage banking, financing activities, and similar operating decisions must be approved by the business unit’s management and/or corporate senior management.
At December 31, 2011, we employed 3,579 people, of which 577 people were employed in our Financial Services operations. Except for a small group of employees in our St. Louis homebuilding division, our employees are not represented by any union. Contracted work, however, may be performed by union contractors. Our local and corporate management personnel are paid incentive compensation based on a combination of individual performance and the performance of the applicable business unit or the Company. Each business unit is given a level of autonomy regarding employment of personnel, although our senior corporate management acts in an advisory capacity in the employment of subsidiary officers. We consider our employee and contractor relations to be satisfactory.

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ITEM 1A.     RISK FACTORS
Discussion of our business and operations included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are, or may become, subject. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies, or prospects in a material and adverse manner.
Downward changes in general economic, real estate construction, or other business conditions could adversely affect our business or our financial results.
The residential homebuilding industry is sensitive to changes in economic conditions and other factors, such as the level of employment, consumer confidence, consumer income, availability of financing, and interest rate levels. Adverse changes in any of these conditions generally, or in the markets where we operate, could decrease demand and pricing for new homes in these areas or result in customer cancellations of pending contracts, which could adversely affect the number of home deliveries we make or reduce the prices we can charge for homes, either of which could result in a decrease in our revenues and earnings and would adversely affect our financial condition.
The homebuilding industry is currently experiencing an economic down cycle, which has had an adverse effect on our business and results of operations.
Prior to 2006, land and home prices rose significantly in many of our markets. Since early 2006, the U.S. housing market has been unfavorably impacted by severe weakness in new home sales attributable to, among other factors, weak consumer confidence, tightened mortgage standards, significant foreclosure activity, a more challenging appraisal environment, higher than normal unemployment levels, and significant uncertainty in the global economy. These conditions have contributed to sharply weakened demand for new homes and heightened pricing pressures on new and existing home sales. As a result of these factors, we have experienced significant decreases in our revenues and profitability. We have also incurred substantial impairments of our land inventory and certain other assets. We cannot predict the duration or the severity of the current market conditions, nor provide any assurances that the adjustments we have made in our operating strategy to address these conditions will be successful.
If the market value of our land and homes drops significantly, our profits could decrease.
The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market conditions and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. If housing demand decreases below what we anticipated when we acquired our inventory, we may not be able to make profits similar to what we have made in the past, we may experience less than anticipated profits, and/or we may not be able to recover our costs when we sell and build homes. When market conditions are such that land values are not appreciating, option arrangements previously entered into may become less desirable, at which time we may elect to forego deposits and pre-acquisition costs and terminate the agreement. In the face of adverse market conditions, we may have substantial inventory carrying costs, we may have to write down our inventory to its fair value, and/or we may have to sell land or homes at a loss.
As a result of the changing market conditions in the homebuilding industry that have occurred since early 2006, we incurred significant land-related charges resulting from the write-off of deposits and pre-acquisition costs related to land transactions we elected not to pursue, net realizable valuation adjustments related to land positions sold or held for sale, impairments on land assets related to communities under development or to be developed in the future, impairments of our investments in unconsolidated joint ventures, and impairments of our recorded goodwill. It is reasonably possible that the estimated cash flows from our projects may change and could result in a future need to record additional valuation adjustments. Additionally, if conditions in the homebuilding industry or our local markets worsen in the future, if the current difficult market conditions extend beyond our expectations, or if our strategy related to certain communities changes, we may be required to evaluate our assets for additional impairments or write-downs, which could result in additional charges that might be significant.

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Our success depends on our ability to acquire land suitable for residential homebuilding at reasonable prices, in accordance with our land investment criteria.
The homebuilding industry is highly competitive for suitable land. The availability of finished and partially finished developed lots and undeveloped land for purchase that meet our internal criteria depends on a number of factors outside our control, including land availability in general, competition with other homebuilders and land buyers for desirable property, inflation in land prices, zoning, allowable housing density, and other regulatory requirements. Should suitable lots or land become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased, perhaps substantially, which could adversely impact our results of operations.
Our long-term ability to build homes depends on our acquiring land suitable for residential building at reasonable prices in locations where we want to build. In the past, we experienced significant competition for suitable land as a result of land constraints in many of our markets. As competition for suitable land increases, and as available land is developed, the cost of acquiring suitable remaining land could rise, and the availability of suitable land at acceptable prices may decline. Any land shortages or any decrease in the supply of suitable land at reasonable prices could limit our ability to develop new communities or result in increased land costs. We may not be able to pass through to our customers any increased land costs, which could adversely impact our revenues, earnings, and margins.
We are subject to claims related to mortgage loans we sold in the secondary mortgage market that may be significant.
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 certain representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards, the type of collateral, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan.  We may also be required to indemnify underwriters that purchased and securitized loans originated by a former subsidiary of Centex for losses incurred by investors in those securitized loans based on similar breaches of representations and warranties.
To date, the significant majority of these losses relate to loans originated in 2006 and 2007, during which period inherently riskier loan products became more common in the origination market. In 2006 and 2007, we originated $39.5 billion of loans, excluding loans originated by Centex's former subprime loan business sold by Centex in 2006.
In addition, we entered into an agreement in conjunction with the wind down of Centex’s mortgage operations, which ceased loan origination activities in December 2009, that provides a guaranty for one major investor of loans originated by Centex.  This guaranty provides that we will honor the potential repurchase obligations of Centex’s mortgage operations related to breaches of similar representations in the origination of a certain pool of loans.
The resolution of claims related to alleged breaches of these representations and warranties and repurchase claims could have a material adverse effect on our financial condition, cash flows and results of operations, and could exceed existing estimates and accruals. The repurchase liability we recorded is estimated based on several factors, including the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase.  The factors referred to above are subject to change in light of market developments, the economic environment, and other circumstances, some of which are beyond our control. Accordingly, there can be no assurance that such reserves will not need to be increased in the future.

11



Future increases in interest rates, reductions in mortgage availability, or increases in the effective costs of owning a home could prevent potential customers from buying our homes and adversely affect our business and financial results.
A large majority of our customers finance their home purchases through mortgage loans, many through our mortgage bank. Interest rates have been near historical lows for several years, which has made new homes more affordable. Increases in interest rates or decreases in the availability of mortgage financing, however, could reduce the market for new homes. Potential homebuyers may be less willing or able to pay the increased monthly costs or to obtain mortgage financing that exposes them to interest rate changes. Lenders may increase the qualifications needed for mortgages or adjust their terms to address any increased credit risk. Even if potential customers do not need financing, changes in interest rates and mortgage availability could make it harder for them to sell their current homes to potential buyers who need financing. These factors could adversely affect the sales or pricing of our homes and could also reduce the volume or margins in our financial services business. Beginning in early 2007, the availability of certain mortgage financing products became more constrained as the mortgage industry began to more closely scrutinize sub-prime, Alt-A, and other non-conforming mortgage products. Our financial services business could also be impacted to the extent we are unable to match interest rates and amounts on loans we have committed to originate through the various hedging strategies we employ. These developments have had, and may continue to have, a material adverse effect on the overall demand for new housing and thereby on the results of operations for our homebuilding business.
In addition, the Federal Reserve has purchased a sizeable amount of mortgage-backed securities in part to stabilize mortgage interest rates and to support the market for mortgage-backed securities. As the Federal Reserve reduces its holdings of mortgage-backed securities over time, the availability and affordability of mortgage loans, including the consumer interest rates for such loans, could be adversely affected.
We also believe that the availability of FHA and VA mortgage financing is an important factor in marketing some of our homes. The FHA has and may continue to impose stricter loan qualification standards, raise minimum down payment requirements, impose higher mortgage insurance premiums and other costs, and/or limit the number of mortgages it insures. The liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry is also critical to the housing market. The impact of the federal government’s conservatorship of Fannie Mae and Freddie Mac on the short-term and long-term demand for new housing remains unclear. Any limitations or restrictions on the availability of financing by these agencies could adversely affect interest rates, mortgage financing, and our sales of new homes and mortgage loans.
Significant costs of homeownership include mortgage interest expense and real estate taxes, both of which are generally deductible for an individual’s federal and, in some cases, state income taxes. Any changes to income tax laws by the federal government or a state government to eliminate or substantially reduce these income tax deductions, as has been considered from time to time, would increase the after-tax cost of owning a home. Increases in real estate taxes by local governmental authorities also increase the cost of homeownership. Any such increases to the cost of homeownership could adversely impact the demand for and sales prices of new homes.
Adverse capital and credit market conditions may significantly affect our access to capital and cost of capital.
The capital and credit markets have experienced significant volatility in recent years. In many cases, the markets have exerted downward pressure on the availability of liquidity and credit capacity for issuers. We need liquidity for future growth and development of our business. Without sufficient liquidity, we may not be able to purchase additional land or develop land, which could adversely affect our financial results. At December 31, 2011, we had cash and equivalents of $1.1 billion as well as restricted cash totaling $101.9 million. However, our internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional financing on terms acceptable to us, or at all.
Another source of liquidity includes our ability to use letters of credit and surety bonds pursuant to certain performance-related obligations and 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. At December 31, 2011, we had outstanding letters of credit and surety bonds totaling $235.9 million and $1.2 billion, respectively. Of these amounts outstanding, $83.2 million of the letters of credit were subject to cash-collateralized agreements while the remaining letters of credit and surety bonds were unsecured. If we are unable to obtain letters of credit or surety bonds when required, or the conditions imposed by issuers increase significantly, our financial condition and results of operations could be adversely affected.

12



Competition for homebuyers could reduce our deliveries or decrease our profitability.
The housing industry in the United States is highly competitive. We compete primarily on the basis of location, price, quality, reputation, design, community amenities, and our customers' overall sales and homeownership experiences. We compete in each of our markets with numerous national, regional, and local homebuilders. This competition with other homebuilders could reduce the number of homes we deliver or cause us to accept reduced margins in order to maintain sales volume.
We also compete with resales of existing or foreclosed homes, housing speculators, and available rental housing. Increased competitive conditions in the residential resale or rental market in the regions where we operate could decrease demand for new homes or unfavorably impact pricing for new homes.
Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.
The homebuilding industry is highly competitive for skilled labor and materials. Additionally, the cost of certain building materials, especially lumber, steel, concrete, copper, and petroleum-based materials, is influenced by changes in global commodity prices. Increased costs or shortages of skilled labor and/or materials could cause increases in construction costs and construction delays. We may not be able to pass on increases in construction costs to customers and generally are unable to pass on any such increases to customers who have already entered into sales contracts as those sales contracts generally fix the price of the home at the time the contract is signed, which may be well in advance of the construction of the home. Sustained increases in construction costs may, over time, erode our margins, and pricing competition for materials and labor may restrict our ability to pass on any such additional costs, thereby decreasing our margins.
Our income tax provision and tax reserves may be insufficient if a taxing authority is successful in asserting positions that are contrary to our interpretations and related reserves, if any.
Significant judgment is required in determining our provision for income taxes and our reserves for federal, state, and local taxes. In the ordinary course of business, there may be matters for which the ultimate outcome is uncertain. Our evaluation is based on a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits, and effective settlement of audit issues. Although we believe our approach to determining the tax treatment is appropriate, no assurance can be given that the final tax authority review will not be materially different than that which is reflected in our income tax provision and related tax reserves. Such differences could have a material adverse effect on our income tax provision in the period in which such determination is made and, consequently, on our net income for such period.
We are periodically audited by various federal, state, and local authorities regarding tax matters. Our current audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit, appeal and, in some cases, litigation process. As each audit is concluded, adjustments, if any, are appropriately recorded in our financial statements in the period determined. To provide for potential tax exposures, we maintain tax reserves based on reasonable estimates of potential audit results. If these reserves are insufficient upon completion of an audit, there could be an adverse impact on our financial position and results of operations.
We may not realize our deferred income tax assets.
The ultimate realization of our deferred income tax assets is dependent upon generating future taxable income and executing tax planning strategies. We have recorded valuation allowances against our deferred income tax assets. The valuation allowance will fluctuate as conditions change.
Our ability to utilize net operating losses (“NOLs”), built-in losses (“BILs”), and tax credit carryforwards to offset our future taxable income would be limited if we were to undergo an “ownership change” within the meaning of Section 382 of the Internal Revenue Code (the “IRC”). In general, an “ownership change” occurs whenever the percentage of the stock of a corporation owned by “5-percent shareholders” (within the meaning of Section 382 of the IRC) increases by more than 50 percentage points over the lowest percentage of the stock of such corporation owned by such “5-percent shareholders” at any time over the testing period.

13



An ownership change under Section 382 of the IRC would establish an annual limitation to the amount of NOLs, BILs, and tax credit carryforwards we could utilize to offset our taxable income in any single year. The application of these limitations might prevent full utilization of the deferred tax assets attributable to our NOLs, BILs, and tax credit carryforwards. We have not experienced an ownership change as defined by Section 382. To preserve our ability to utilize NOLs, BILs, and other tax benefits in the future without a Section 382 limitation, we adopted a shareholder rights plan, which is triggered upon certain transfers of our securities, and amended our by-laws to prohibit certain transfers of our securities. Notwithstanding the foregoing measures, there can be no assurance that we will not undergo an ownership change within the meaning of Section 382.
As a result of the merger with Centex, our ability to use certain of Centex’s pre-ownership change NOLs, BILs, or deductions is limited under Section 382 of the Internal Revenue Code. The applicable Section 382 limitation is approximately $67.4 million per year for NOLs, losses realized on built-in loss assets that are sold within 60 months of the ownership change, and certain deductions. The limitation may result in a significant portion of Centex’s pre-ownership change NOLs, BILs, and tax credit carryforwards or deductions not being available for our use.
The value of our deferred tax assets is also dependent upon the tax rates in effect at the time taxable income is expected to be generated. A decrease in enacted corporate tax rates in our major jurisdictions, especially the U.S. federal corporate tax rate, would decrease the value of our deferred tax assets, which could be material.
We have significant intangible assets. If these assets become impaired, then our profits and shareholders’ equity may be reduced.
We have significant intangible assets related to prior business combinations. We evaluate the recoverability of intangible assets whenever facts and circumstances indicate the carrying amount may not be recoverable. If the carrying value of intangible assets is deemed impaired, the carrying value is written down to fair value. This would result in a charge to our operating earnings. If management’s expectations of future results and cash flows decrease significantly, impairments of the remaining intangible assets may occur.
Government regulations could increase the cost and limit the availability of our development and homebuilding projects or affect our related financial services operations and adversely affect our business or financial results.
Our operations are subject to building, environmental, and other regulations imposed and enforced by various federal, state, and local governing authorities. For our homes to qualify for FHA or VA mortgages, we must satisfy valuation standards and site, material, and construction requirements of those agencies. Our compliance with federal, state, and local laws relating to protection of the environment has had, to date, no material effect upon capital expenditures, earnings, or competitive position. More stringent requirements could be imposed in the future on homebuilders and developers, thereby increasing the cost of compliance.
New housing developments may be subject to various assessments for schools, parks, streets, and other public improvements. These can cause an increase in the effective prices for our homes.
We also are subject to a variety of local, state, and federal laws and regulations concerning protection of health, safety, and the environment. The impact of environmental laws varies depending upon the prior uses of the building site or adjoining properties and may be greater in areas with less supply where undeveloped land or desirable alternatives are less available. These matters may result in delays, may cause us to incur substantial compliance, remediation and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or areas.
Our financial services operations are also subject to numerous federal, state, and local laws and regulations. These include eligibility requirements for participation in federal loan programs and compliance with consumer lending and similar requirements such as disclosure requirements, prohibitions against discrimination, and real estate settlement procedures. They may also subject our operations to examination by applicable agencies, pursuant to which those agencies may limit our ability to provide mortgage financing or title services to potential purchasers of our homes.

14



Homebuilding is subject to warranty and other claims in the ordinary course of business that can be significant.
As a homebuilder, we are subject to home warranty, construction defect, and other claims arising in the ordinary course of business. We record warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes built. We have, and require our subcontractors to have, general liability, property, errors and omissions, workers compensation, and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits. We reserve for costs to cover our self-insured and deductible amounts under these policies and for any costs of claims and lawsuits based on an analysis of our historical claims, which includes an estimate of claims incurred but not yet reported. Because of the uncertainties inherent in these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements, and our reserves will be adequate to address all our warranty and construction defect claims in the future. Contractual indemnities can be difficult to enforce, we may be responsible for applicable self-insured retentions, and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of general liability insurance for construction defects are currently costly and limited. We have responded to the recent increases in insurance costs and coverage limitations by increasing our self-insured retentions and claim reserves. There can be no assurance that coverage will not be further restricted and become more costly. Additionally, we are exposed to counterparty default risk related to our and our subcontractors’ insurance carriers.
Natural disasters and severe weather conditions could delay deliveries, increase costs, and decrease demand for new homes in affected areas.
Our homebuilding operations are located in many areas that are subject to natural disasters and severe weather. The occurrence of natural disasters or severe weather conditions can delay new home deliveries, increase costs by damaging inventories, reduce the availability of materials, and negatively impact the demand for new homes in affected areas. Furthermore, if our insurance does not fully cover business interruptions or losses resulting from these events, our earnings, liquidity, or capital resources could be adversely affected.
Inflation may result in increased costs that we may not be able to recoup if demand declines.
Inflation can have a long-term impact on us because increasing costs of land, materials, and labor may require us to increase the sales prices of homes in order to maintain satisfactory margins. In addition, inflation is often accompanied by higher interest rates, which have a negative impact on housing demand, in which case we may not be able to raise home prices sufficiently to keep up with the rate of inflation and our margins could decrease.
Future terrorist attacks against the United States or increased domestic and international instability could have an adverse effect on our operations.
A future terrorist attack against the U.S. could cause a sharp decrease in the number of new contracts signed for homes and an increase in the cancellation of existing contracts. Accordingly, adverse developments in the war on terrorism, future terrorist attacks against the U.S., or increased domestic and international instability could adversely affect our business.

15



ITEM 1B.     UNRESOLVED STAFF COMMENTS
This Item is not applicable.
ITEM 2.     PROPERTIES
Our homebuilding and corporate headquarters are located in leased office facilities at 100 Bloomfield Hills Parkway, Bloomfield Hills, Michigan 48304. Pulte Mortgage leases its primary office facilities in Englewood, Colorado, and we also maintain various support functions in leased facilities near Phoenix, Arizona. Our homebuilding divisions and financial services branches lease office space in the geographic locations in which they conduct their day-to-day operations.
Because of the nature of our homebuilding operations, significant amounts of property are held as inventory in the ordinary course. Such properties are not included in response to this Item.
ITEM 3.     LEGAL PROCEEDINGS
We are involved in various legal and governmental proceedings incidental to our continuing business operations, many involving claims related to certain construction defects. The consequences of these matters are not presently determinable but, in our opinion, after consulting with legal counsel and taking into account insurance and reserves, the ultimate liability is not expected to 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 our estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.
ITEM 4.     MINE SAFETY DISCLOSURES
This Item is not applicable.


16



ITEM 4A.        EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to our executive officers.
Name
Age
 
Position
 
Year Became
An Executive Officer
Richard J. Dugas, Jr.
46
 
Chairman, President and Chief Executive Officer
 
2002
Robert T. O'Shaughnessy
46
 
Executive Vice President and Chief Financial Officer
 
2011
James R. Ellinghausen
53
 
Executive Vice President, Human Resources
 
2005
Deborah W. Meyer
49
 
Senior Vice President and Chief Marketing Officer
 
2009
Steven M. Cook
53
 
Senior Vice President, General Counsel and Secretary
 
2006
John B. Bertero, III
51
 
Area President, East
 
2011
Harmon D. Smith
48
 
Area President, Gulf Coast
 
2011
Patrick J. Beirne
48
 
Area President, Central
 
2011
John J. Chadwick
50
 
Area President, Southwest
 
2012
Michael J. Schweninger
43
 
Vice President and Controller
 
2009
The following is a brief account of the business experience of each officer during the past five years:
Mr. Dugas was appointed Chairman in August 2009 and President and Chief Executive Officer in July 2003. Prior to that time, he served as Executive Vice President and Chief Operating Officer. He was appointed Chief Operating Officer in May 2002 and Executive Vice President in December 2002. Since joining our company in 1994, he has served in a variety of management positions.
Mr. O'Shaughnessy was appointed Executive Vice President and Chief Financial Officer in May 2011. Prior to joining our company, he held a number of financial roles at Penske Automotive Group from 1997 to 2011, most recently as Executive Vice President and Chief Financial Officer.
Mr. Ellinghausen was appointed Executive Vice President, Human Resources in December 2006.
Ms. Meyer was appointed Senior Vice President and Chief Marketing Officer in September 2009. Prior to joining our company, Ms. Meyer held various senior marketing positions, most recently serving as Vice President and Chief Marketing Officer for Chrysler, LLC from August 2007 to December 2008. Prior to joining Chrysler, LLC, Ms. Meyer held various marketing positions at Toyota Motor Sales from 2001 to 2007, most recently as Vice President of Marketing for Lexus.
Mr. Cook was appointed Senior Vice President, General Counsel and Secretary in December 2008 and previously held the position of Vice President, General Counsel and Secretary since February 2006.
Mr. Bertero was appointed Area President, East in August 2009. Prior to joining our company, Mr. Bertero was a regional executive vice president with Centex Corporation since 2006.
Mr. Smith was appointed Area President, Gulf Coast in 2008 and has served as an Area President over various geographical markets since 2006.
Mr. Beirne was appointed Area President, Central in 2012 and has served as an Area President over various geographical markets since 2006.
Mr. Chadwick was appointed Area President, Southwest in 2012 and previously held the position of Division President for our Arizona division. Since 2006, Mr. Chadwick has held the position of Area President or Division President over various geographical markets.
Mr. Schweninger was appointed Vice President and Controller effective March 2009. Since joining our company in 2005, he also has held the positions of Director – Finance & Accounting Process Improvement and Director of Corporate Audit.
There is no family relationship between any of the officers. Each officer serves at the pleasure of the Board of Directors.

17



PART II
 
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares are listed on the New York Stock Exchange (Symbol: PHM).
Related Stockholder Matters
The table below sets forth, for the quarterly periods indicated, the range of high and low closing prices and cash dividends declared per share.
 
 
December 31, 2011
 
December 31, 2010
 
High
 
Low
 
Declared
Dividend
 
High
 
Low
 
Declared
Dividend
1st Quarter
$
8.69

 
$
6.54

 
$

 
$
11.74

 
$
10.22

 
$

2nd Quarter
8.44

 
6.93

 

 
13.39

 
8.28

 

3rd Quarter
7.84

 
3.61

 

 
9.07

 
7.84

 

4th Quarter
6.48

 
3.54

 

 
8.73

 
6.2

 

At February 1, 2012, there were 3,106 shareholders of record.
Issuer Purchases of Equity Securities (1)
 
(a)
Total number
of shares
purchased (2)
 
(b)
Average
price paid
per share (2)
 
(c)
Total number of
shares purchased
as part of publicly
announced plans
or programs
 
(d)
Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs
($000’s omitted)
October 1, 2011 to October 31, 2011

 

 

 
102,342(1)
November 1, 2011 to November 30, 2011

 

 

 
102,342(1)
December 1, 2011 to December 31, 2011
134,219

 
$
6.07

 

 
102,342(1)
Total
134,219

 
$
6.07

 

 
 
 
(1)
Pursuant to the two $100 million stock repurchase programs authorized and announced by our Board of Directors in October 2002 and October 2005 and the $200 million stock repurchase authorized and announced in February 2006 (for a total stock repurchase authorization of $400 million), the Company has repurchased a total of 9,688,900 shares for a total of $297.7 million. There are no expiration dates for the programs.
(2)
During the fourth quarter of 2011, a total of 134,219 shares were surrendered by employees for payment of minimum tax obligations upon the vesting of restricted stock. Such shares were not repurchased as part of our publicly-announced stock repurchase programs.
The information required by this item with respect to equity compensation plans is set forth under Item 12 of this annual report on Form 10-K and is incorporated herein by reference.

18



Performance Graph
The following line graph compares for the fiscal years ended December 31, 2007, 2008, 2009, 2010, and 2011 (a) the yearly cumulative total shareholder return (i.e., the change in share price plus the cumulative amount of dividends, assuming dividend reinvestment, divided by the initial share price, expressed as a percentage) on PulteGroup’s common shares, with (b) the cumulative total return of the Standard & Poor’s 500 Stock Index, and with (c) the Dow Jones U.S. Select Home Construction Index. The Dow Jones U.S. Select Home Construction Index is a widely-recognized index comprised primarily of large national homebuilders. We believe comparison of our shareholder return to this index represents a meaningful analysis for investors.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG PULTEGROUP, INC., S&P 500 INDEX, AND PEER INDEX
Fiscal Year Ended December 31, 2011
 
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
PULTEGROUP, INC.
 
100.00

 
32.13

 
33.75

 
30.88

 
23.22

 
19.48

S&P 500 Index - Total Return
 
100.00

 
105.49

 
66.46

 
84.05

 
96.71

 
98.76

Dow Jones U.S. Select Home Construction
     Index
 
100.00

 
42.58

 
25.46

 
26.25

 
29.19

 
26.70


* Assumes $100 invested on December 31, 2006, and the reinvestment of dividends.




19



ITEM 6.      SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial data for each of the past five fiscal years. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and Notes thereto included elsewhere in this report.
 
Years Ended December 31,
($000’s omitted, except per share data)
 
2011
 
2010
 
2009 (b)
 
2008
 
2007
OPERATING DATA:
 
 
 
 
 
 
 
 
 
Homebuilding:
 
 
 
 
 
 
 
 
 
Revenues
$
4,033,596

 
$
4,447,627

 
$
3,966,589

 
$
6,112,038

 
$
9,121,730

Income (loss) before income taxes
$
(275,830
)
 
$
(1,240,155
)
 
$
(1,920,081
)
 
$
(1,710,644
)
 
$
(2,539,883
)
Financial Services:
 
 
 
 
 
 
 
 
 
Revenues
$
103,094

 
$
121,663

 
$
117,800

 
$
151,016

 
$
134,769

Income (loss) before income taxes
$
(34,470
)
 
$
5,609

 
$
(55,038
)
 
$
28,045

 
$
42,980

Consolidated results:
 
 
 
 
 
 
 
 
 
Revenues
$
4,136,690

 
$
4,569,290

 
$
4,084,389

 
$
6,263,054

 
$
9,256,499

Income (loss) from continuing operations before
     income taxes
$
(310,300
)
 
$
(1,234,546
)
 
$
(1,975,119
)
 
$
(1,682,599
)
 
$
(2,496,903
)
Income tax expense (benefit)
(99,912
)
 
(137,817
)
 
(792,552
)
 
(209,486
)
 
(222,486
)
Income (loss) from continuing operations
(210,388
)
 
(1,096,729
)
 
(1,182,567
)
 
(1,473,113
)
 
(2,274,417
)
Income (loss) from discontinued operations (a)

 

 

 

 
18,662

Net income (loss)
$
(210,388
)
 
$
(1,096,729
)
 
$
(1,182,567
)
 
$
(1,473,113
)
 
$
(2,255,755
)
PER SHARE DATA:
 
 
 
 
 
 
 
 
 
Earnings per share - basic:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.55
)
 
$
(2.90
)
 
$
(3.94
)
 
$
(5.81
)
 
$
(9.02
)
Income (loss) from discontinued operations (a)

 

 

 

 
0.07

Net income (loss)
$
(0.55
)
 
$
(2.90
)
 
$
(3.94
)
 
$
(5.81
)
 
$
(8.94
)
Weighted-average common shares outstanding
     (000’s omitted)
379,877

 
378,585

 
300,179

 
253,512

 
252,192

Earnings per share - assuming dilution:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
(0.55
)
 
$
(2.90
)
 
$
(3.94
)
 
$
(5.81
)
 
$
(9.02
)
Income (loss) from discontinued operations (a)

 

 

 

 
0.07

Net income (loss)
$
(0.55
)
 
$
(2.90
)
 
$
(3.94
)
 
$
(5.81
)
 
$
(8.94
)
Weighted-average common shares outstanding and
     effect of dilutive securities (000’s omitted)
379,877

 
378,585

 
300,179

 
253,512

 
252,192

Shareholders’ equity
$
5.07

 
$
5.59

 
$
8.39

 
$
10.98

 
$
16.80

Cash dividends declared
$

 
$

 
$

 
$
0.16

 
$
0.16

(a)
Income (loss) from discontinued operations is comprised of our former thrift operation and Argentina and Mexico homebuilding operations, which have been presented as discontinued operations for all periods presented.
(b)
Includes Centex’s operations since August 18, 2009.

20



 
December 31,
($000’s omitted)
 
2011
 
2010
 
2009 (b)
 
2008
 
2007
BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
House and land inventory
$
4,636,468

 
$
4,781,813

 
$
4,940,358

 
$
4,201,289

 
$
6,835,945

Total assets
6,885,620

 
7,699,376

 
10,051,222

 
7,708,458

 
10,225,703

Senior notes
3,088,344

 
3,391,668

 
4,281,532

 
3,166,305

 
3,478,230

Shareholders’ equity
1,938,615

 
2,135,167

 
3,194,440

 
2,835,698

 
4,320,193

 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
2011
 
2010
 
2009 (b)
 
2008
 
2007
OTHER DATA:
 
 
 
 
 
 
 
 
 
Markets, at year-end
61

 
67

 
69

 
49

 
51

Active communities, at year-end
700

 
786

 
882

 
572

 
737

Closings (units)
15,275

 
17,095

 
15,013

 
21,022

 
27,540

Net new orders (units)
15,215

 
15,148

 
14,185

 
15,306

 
25,175

Backlog (units), at year-end
3,924

 
3,984

 
5,931

 
2,174

 
7,890

Average selling price (per unit)
$
259,000

 
$
259,000

 
$
258,000

 
$
284,000

 
$
322,000

Gross margin from home sales (a)
12.8
%
 
9.4
%
 
(10.5
)%
 
(10.1
)%
 
(5.0
)%
 (a)
Homebuilding interest expense, which represents the amortization of capitalized interest, and land and community valuation adjustments are included in home sale cost of revenues.
(b)
Includes Centex’s operations since August 18, 2009.


21



ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On August 18, 2009, we completed the acquisition of Centex through the merger of PulteGroup’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among PulteGroup, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of PulteGroup. Accordingly, the results of Centex are included in our consolidated financial statements from the date of the merger.
The U.S. housing market and broader economy remain in a period of uncertainty. While we have experienced some stabilization in our local markets, homebuilding industry volumes remain at near historically low levels. This more stable environment has resulted in a significant reduction in the level of land-related charges recorded during 2011 compared with recent years. However, significant short-term uncertainty remains such that we are not anticipating a broad recovery in homebuilding in the near term. Factors that are currently impacting the homebuilding industry negatively include:

High levels of unemployment and associated low levels of consumer confidence;
Continued high levels of foreclosure activity;
Increased costs and standards related to FHA loans, which are a significant source of customer financing; and
Uncertainty regarding the potential impacts of reforms to the overall U.S. financial services and mortgage industries, including the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted into law on July 21, 2010; potential limitations on the mortgage interest income tax deduction; and potential future restructurings of Fannie Mae and Freddie Mac.
During 2011, we experienced a return to a somewhat more traditional demand pattern as new orders were higher in the first half of the year and home closings increased in each quarter throughout the year. While our overall volumes in 2011 were moderately lower than in 2010, the combination of improved gross margins, a more efficient overhead structure, and lower asset impairment charges resulted in a significant improvement in our bottom line results. We believe that improved employment levels and consumer confidence are necessary to unlock the pent-up demand that we believe has built up in recent years. Accordingly, we continue to operate our business with the expectation that difficult market conditions will continue to impact us for at least the near term while also positioning ourselves to capitalize upon growth when industry conditions improve. While we are purchasing land positions where it makes strategic and economic sense to do so, the opportunity to purchase developed lots in premium locations has become more limited and competitive in many of our markets. We also continue to evaluate each of our existing land parcels to determine whether the strategy and economics support holding the parcel or disposing of it. We have closely evaluated and made significant reductions in employee headcount and overhead expenses since the beginning of the industry downturn, including a further consolidation of our field organization and select corporate functions during 2011. Due to the persistence of these difficult market conditions, maintaining an efficient overhead structure will continue to be a significant area of focus. We are also adjusting the content in our homes to provide our customers more affordable alternatives and are building homes with smaller floor plans in certain of our communities.
Our outlook is cautious for 2012 as the timing of a sustainable recovery in the homebuilding industry remains uncertain. In the long-term, we continue to believe that the national publicly-traded builders will have a competitive advantage over local builders through their ability to leverage economies of scale, access to more reliable and lower cost financing through the capital markets, ability to control and entitle large land positions, and greater geographic and product diversification. Among the national publicly-traded peer group, we believe that builders with more significant land positions, broad geographic and product diversity, and sustainable capital positions will benefit as market conditions recover. In the short-term, we expect that market conditions will remain challenging, and our visibility as to future earnings performance is limited. Our evaluations for land-related charges recorded to date were based on our best estimates of the future cash flows for our communities. If conditions in the homebuilding industry or our local markets worsen in the future, if the current difficult market conditions extend beyond our expectations, or if our strategy related to certain communities changes, we may be required to evaluate our assets for further impairments or write-downs, which could result in future charges that might be significant.

22



The following is a summary of our operating results by line of business ($000's omitted, except per share data):
 
Years Ended December 31,
 
2011
 
2010
 
2009
Income (loss) before income taxes:
 
 
 
 
 
Homebuilding*
$
(275,830
)
 
$
(1,240,155
)
 
$
(1,920,081
)
Financial Services
(34,470
)
 
5,609

 
(55,038
)
Income (loss) from continuing operations before income taxes
(310,300
)
 
(1,234,546
)
 
(1,975,119
)
Income tax expense (benefit)
(99,912
)
 
(137,817
)
 
(792,552
)
Net income (loss)
$
(210,388
)
 
$
(1,096,729
)
 
$
(1,182,567
)
Per share data - assuming dilution:
 
 
 
 
 
Net income (loss)
$
(0.55
)
 
$
(2.90
)
 
$
(3.94
)

*
Amounts previously classified as "non-operating" have been reclassified to "Homebuilding" (see to the Consolidated Financial Statements).
The losses experienced by Homebuilding in 2011, 2010, and 2009 resulted primarily from significant charges related to the following ($000's omitted):
 
2011
 
2010
 
2009
Land-related charges (see Note 6)
$
35,786

 
$
216,352

 
$
973,289

Goodwill impairments (see Note 3)
240,541

 
656,298

 
562,990

Restructuring costs (see Note 4)
19,696

 
50,718

 
64,453

Merger-related costs (see Note 2)
1,730

 
4,133

 
72,079

Loss on debt retirements (see Note 8)
5,638

 
38,920

 
31,594

Insurance-related adjustments (see Note 15)

 
280,390

 

 
$
303,391

 
$
1,246,811

 
$
1,704,405

For additional information on each of the above, see the applicable Notes to the Consolidated Financial Statements.
Merger-related costs represent transaction and integration costs resulting directly from the Centex merger. In total, Homebuilding incurred $129.1 million of such costs in 2009. These costs consisted of $57.0 million of restructuring costs (primarily severance and lease exit costs) included in the above table within restructuring costs plus $72.1 million of investment banking and other professional fees, amortization of certain fair value adjustments, and certain other integration costs.
In addition to the above charges, Homebuilding continued to experience low volumes in 2009 through 2011. The revenue decline for the year ended December 31, 2011 was due in part to the impact of a federal homebuyer tax credit that existed during the first half of 2010 as well as lower average selling prices and fewer active communities in 2011. The lower revenue in 2011 and 2010 was partially offset by improved gross margins, reduced overhead costs, and lower impairment charges.
The Financial Services loss in 2011 compared to income in 2010 was due to lower volumes and increased loss reserves related to loans originated in previous years. Such loss reserves totaled $59.3 million in 2011, compared with $16.9 million in 2010 (see Note 15 to the Consolidated Financial Statements). Financial Services income in 2010 was improved from 2009 primarily due to reduced loan loss reserves, which totaled $60.9 million in 2009. The Financial Services loss in 2009 also included certain integration costs directly related to the Centex merger totaling $8.4 million, which consisted primarily of severance benefits and lease exit and related asset impairment costs.
The income tax benefits in 2011 and 2010 were attributable primarily to the favorable resolution of certain federal and state income tax matters. The income tax benefit in 2009 reflected the impact of the Worker, Homeownership, and Business Assistance Act of 2009, which allowed us to carry back 2009 taxable losses to prior years and receive refunds of previously paid federal income taxes.

23



Homebuilding Operations
The following is a summary of income (loss) before income taxes for our Homebuilding operations ($000’s omitted):
 
Years Ended December 31,
 
2011
 
FY 2011 vs. FY 2010
 
2010
 
FY 2010 vs. FY 2009
 
2009
Home sale revenues
$
3,950,743

 
(11
)%
 
$
4,419,812

 
14
 %
 
$
3,869,297

Land sale revenues
82,853

 
198
 %
 
27,815

 
(71
)%
 
97,292

Total Homebuilding revenues
4,033,596

 
(9
)%
 
4,447,627

 
12
 %
 
3,966,589

Home sale cost of revenues (a)
3,444,398

 
(14
)%
 
4,006,385

 
(6
)%
 
4,274,474

Land sale cost of revenues (b)
59,279

 
11
 %
 
53,555

 
(75
)%
 
211,170

Selling, general and administrative expenses ("SG&A") (c)
519,583

 
(42
)%
 
895,102

 
33
 %
 
672,434

Equity in (earnings) loss of unconsolidated entities (d)
(3,194
)
 
12
 %
 
(2,843
)
 
(106
)%
 
49,668

Other expense (income), net (e)
293,102

 
(61
)%
 
742,385

 
8
 %
 
685,829

Interest income, net
(3,742
)
 
(45
)%
 
(6,802
)
 
(1
)%
 
(6,905
)
Income (loss) before income taxes
$
(275,830
)
 
(78
)%
 
$
(1,240,155
)
 
(35
)%
 
$
(1,920,081
)
Supplemental data:
 
 
 
 
 
 
 
 
 
Gross margin from home sales
12.8
%
 
340 bps

 
9.4
%
 
1,990 bps

 
(10.5
)%
SG&A as a percentage of home sale revenues
13.2
%
 
(710) bps

 
20.3
%
 
290 bps

 
17.4
 %
Closings (units)
15,275

 
(11
)%
 
17,095

 
14
 %
 
15,013

Average selling price
$
259

 
0
 %
 
$
259

 
0
 %
 
$
258

Net new orders:
 
 
 
 
 
 
 
 
 
Units
15,215

 
0
 %
 
15,148

 
7
 %
 
14,185

Dollars (f)
$
3,953,829

 
1
 %
 
$
3,898,950

 
(19
)%
 
$
4,816,057

Cancellation rate
19
%
 
 
 
19
%
 
 
 
23
 %
Active communities at December 31
700

 
(11
)%
 
786

 
(11
)%
 
882

Backlog at December 31:
 
 
 
 
 
 
 
 
 
Units
3,924

 
(2
)%
 
3,984

 
(33
)%
 
5,931

Dollars
$
1,059,649

 
0
 %
 
$
1,056,563

 
(33
)%
 
$
1,577,424

(a)
Includes the amortization of capitalized interest. Home sale cost of revenues also includes land and community valuation adjustments of $15.9 million, $169.7 million, and $751.2 million for 2011, 2010, and 2009, respectively.
(b)
Includes net realizable value adjustments for land held for sale of $9.8 million, $39.1 million, and $113.7 million for 2011, 2010, and 2009, respectively.
(c)
SG&A for 2010 includes the adverse impact of insurance reserve adjustments totaling $280.4 million.
(d)
Includes impairments of our investments in unconsolidated joint ventures, which totaled $1.9 million and $54.1 million in 2010 and 2009, respectively.
(e)
Includes goodwill impairment charges of $240.5 million, $656.3 million, and $563.0 million in 2011, 2010, and 2009, respectively. Also includes the write-off of deposits and pre-acquisition costs for land option contracts we elected not to pursue of $10.0 million, $5.6 million, and $54.3 million in 2011, 2010, and 2009, respectively, and net losses related to the redemption of debt totaling $5.6 million, $38.9 million, and $31.6 million in 2011, 2010, and 2009, respectively.
(f)
Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.

24



Centex merger
As indicated above, the Centex merger had a significant impact on our post-acquisition operating results. Centex was consolidated for the full year in our 2011 and 2010 operating results, however, if not for the impact of the Centex merger, our revenues, closings, and net new orders in 2010 would have experienced significant decreases from 2009. Our reported home sale revenues, closings, and net new orders for 2010 as reflected in the above tables represent decreases of 19%, 22%, and 28%, respectively, from the combined operating results of the two companies from 2009. However, these lower volumes were offset by lower land-related charges, improved gross margins and operating leverage, and our elimination of the substantial majority of duplicative overhead costs from the combined companies. Excluding the impact of the goodwill impairments and insurance-related losses recorded in 2010 and 2009, our Homebuilding income (loss) before income taxes in 2010 was significantly improved from the losses reported by either company or the combined companies in 2009. This illustrates the impact of the various actions we took to restructure our combined homebuilding operations into a more efficient organization as well as a somewhat more stable environment for the homebuilding industry, albeit at lower industry volumes.
Home sale revenues
Home sale revenues for 2011 were lower than 2010 by $469.1 million, or 11%. The decrease was attributable to an 11% decrease in closings as average selling prices remained stable from 2010 to 2011. The decline in closings for 2011 compared with 2010 occurred in each of our Homebuilding segments, except for Florida, and resulted primarily from lower industry volumes, in part due to the expiration of the federal homebuyer tax credit that existed during 2010 for orders under contract by April 30 and closed by September 30. This tax credit favorably impacted new orders and closings during the first half of 2010, in part we believe by pulling forward customer demand. The 11% decrease in our active communities also contributed to the lower closings.
Home sale revenues for 2010 were higher than 2009 by $550.5 million, or 14%. The increase in home sale revenues in 2010 over 2009 was attributable to a 14% increase in closings as average selling prices remained stable from 2009 to 2010. As discussed above under Centex merger, the increase in revenues in 2010 resulted from the Centex merger, which contributed $1.9 billion in 2010 compared to $1.1 billion in 2009. The federal homebuyer tax credit described above also contributed to increased revenues in the first half of 2010, which were partially offset by lower revenues in the second half of 2010.
Home sale gross margins
Home sale gross margins were 12.8% in 2011, compared with 9.4% in 2010 and (10.5)% in 2009. Gross margins during 2011 benefited from lower land and community valuation adjustments of $15.9 million, compared with $169.7 million and $751.2 million in 2010 and 2009, respectively. The benefit of these lower charges was partially offset by increased amortization of capitalized interest due to debt assumed with the Centex merger.
Gross margins were also adversely impacted in 2009 by a fair value adjustment related to homes under construction inventory acquired in the Centex merger. We recognized this fair value adjustment as an increase of $31.1 million to home sale cost of revenues as the related homes closed. The amortization of this adjustment was not significant in 2011 or 2010. Excluding the impact of land and community valuation adjustments, amortization of capitalized interest, and merger-related costs, adjusted home sale gross margins improved to 17.9% in 2011 from 16.7% in 2010 and 12.3% in 2009 (see the Non-GAAP Financial Measures section for a reconciliation of adjusted home sale gross margins). These improved gross margins reflect a combination of factors, including shifts in the product and geographic mix of homes closed, better alignment of our product offering with current market conditions, and a shift in our sales strategy toward more “pre-selling” of homes.
Land sales
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 sale revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales had margin contributions of $23.6 million, $(25.7) million, and $(113.9) million in 2011, 2010, and 2009, respectively. These margin contributions included net realizable value adjustments related to land held for sale totaling $9.8 million, $39.1 million, and $113.7 million in 2011, 2010, and 2009, respectively.

25



SG&A
In order to further reduce overhead costs and drive greater leverage, we reconfigured our organization during the fourth quarter of 2010 and again in the second quarter of 2011, consolidating certain local divisions. Along with these changes in our field operations, we also further reduced corporate and support staffing across a number of functions to further consolidate and streamline our operating processes. These actions were a continuation of a series of actions we have taken over the last several years to better align our overhead structure with expected volumes.
The gross dollar amount of our SG&A decreased $375.5 million, or 42%, in 2011 compared to 2010. SG&A, as a percentage of home sale revenues, was 13.2% in 2011, compared with 20.3% in 2010. SG&A in 2010 included $280.4 million in insurance reserve adjustments, substantially all of which related to general liability construction defect claims (see Note 15 to the Consolidated Financial Statements for additional discussion of insurance reserve adjustments). SG&A as a percentage of home sales revenues excluding these insurance reserve adjustments was 13.2% and 13.9% in 2011 and 2010, respectively. (See the Non-GAAP Financial Measures section for a reconciliation of SG&A as a percentage of home sale revenue, excluding insurance reserve adjustments). Excluding the insurance reserve adjustments from 2010, our SG&A declined significantly in gross dollars in 2011 and resulted in an improvement in overhead leverage. This improved overhead leverage resulted from a combination of better matching our overall cost structure with the current business environment and lower severance and equity compensation expense in 2011.
The gross dollar amount of our SG&A increased $222.7 million, or 33%, in 2010 compared to 2009. SG&A, as a percentage of home sale revenues, was 20.3% in 2010, compared with 17.4% in 2009. The increase in 2010 compared to 2009 was the result of the insurance reserve adjustments taken in 2010 noted above. SG&A as a percentage of home sales revenues excluding these insurance reserve adjustments was 13.9% and 17.4% in 2010 and 2009, respectively. This decrease resulted primarily from lower severance costs and the elimination of certain overhead costs directly related to the Centex merger that impacted 2009. In 2010, SG&A included severance costs of $22.3 million. During 2009, SG&A included transaction and integration costs related to the Centex merger, including severance costs, totaling $70.5 million, as well as certain duplicative corporate and divisional overhead costs during the transition period following the merger.
Equity in (earnings) loss of unconsolidated entities
Equity in (earnings) loss of unconsolidated entities was $(3.2) million, $(2.8) million, and $49.7 million, for 2011, 2010, and 2009, respectively. The primary cause for this change in results is the lower levels of impairments related to these entities recorded during 2011 and 2010 as compared to 2009. There were no impairments of investments in unconsolidated joint ventures in 2011, while impairments totaled $1.9 million and $54.1 million in 2010 and 2009, respectively. The majority of our unconsolidated entities represent land development joint ventures. As a result, the timing of income and losses varies between periods depending on the timing of transactions and circumstances specific to each entity.
Other expense (income), net
Other expense (income), net includes the following ($000’s omitted):
 
2011
 
2010
 
2009
Write-offs of deposits and pre-acquisition costs (Note 5)
$
10,002

 
$
5,594

 
$
54,256

Loss on debt retirements (Note 8)
5,638

 
38,920

 
31,594

Lease exit and related costs (Note 4)
9,900

 
28,378

 
24,803

Amortization of intangible assets (Note 1)
13,100

 
13,100

 
14,008

Goodwill impairments (Note 3)
240,541

 
656,298

 
562,990

Miscellaneous expense (income), net
13,921

 
95

 
(1,822
)
 
$
293,102

 
$
742,385

 
$
685,829

For additional information on each of the above, see the applicable Notes to the Consolidated Financial Statements. Miscellaneous expense (income), net includes $17.1 million in 2011 related to the write-down of a note receivable.
Interest income, net
The decrease in interest income, net in 2011 compared with 2010 resulted from lower invested cash balances that resulted primarily from the significant debt retirements we completed in 2011 and 2010. The slight decrease in interest income, net in 2010 compared with 2009 resulted from higher invested cash balances offset by lower interest rates. Additionally, $1.5 million of Homebuilding interest costs were expensed directly to interest expense in 2010 because our debt balance exceeded the amount of active inventory for certain periods and thus was not capitalized into inventory.

26



Net new orders
Net new order levels were essentially flat for 2011 compared with 2010. Net new orders reflect the impact of the federal homebuyer tax credit that expired during 2010, which favorably impacted new orders during the first half of 2010, and the reduced number of active communities in 2011. At December 31, 2011, we had 700 active communities, a decrease of 11% from December 31, 2010. The cancellation rate (canceled orders for the period divided by gross new orders for the period) for 2011 was unchanged from 2010 at 19%. Ending backlog, which represents orders for homes that have not yet closed, was essentially flat at December 31, 2011 compared with December 31, 2010, consistent with the overall new order levels.
For 2010, net new orders increased 7% compared with 2009 primarily due to incremental orders resulting from the Centex merger and the positive impact of the federal homebuyer tax credit in the first half of 2010, partially offset in the latter half of 2010 by a lower average sales pace per community. Excluding Centex, net new order units decreased moderately during 2010 due to the uncertainty in the overall U.S. housing industry. Cancellation rates were slightly lower in 2010 at 19%, compared to 23% in 2009. At December 31, 2010, we had 786 active selling communities, a decrease of 11% from December 31, 2009. Ending backlog at December 31, 2010 declined 33% from December 31, 2009 as the result of the lower community count and the impact of the federal homebuyer tax credit, which pulled forward demand into the first half of 2010.
Homes in production
The following is a summary of our homes in production at December 31, 2011 and 2010:
 
 
2011
 
2010
Sold
 
2,640

 
2,790

Unsold
 
 
 
 
Under construction
 
1,381

 
1,638

Completed
 
1,481

 
1,856

 
 
2,862

 
3,494

Models
 
1,278

 
1,452

Total
 
6,780

 
7,736

Included in our total homes in production were 2,862 and 3,494 homes that were unsold to customers (“spec homes”) at December 31, 2011 and 2010, respectively, of which 1,481 and 1,856 homes, respectively, were completed (“final specs”). The reduction in homes in production at December 31, 2011 compared to 2010 resulted primarily from our lower community count combined with a conscious effort to reduce the number of spec homes, especially final specs.
Controlled lots
The following is a summary of our lots under control at December 31, 2011 and 2010:
 
 
December 31, 2011
 
December 31, 2010
 
 
Owned
 
Optioned
 
Controlled
 
Owned
 
Optioned
 
Controlled
Northeast
 
10,540

 
2,121

 
12,661

 
11,582

 
2,567

 
14,149

Southeast
 
15,016

 
3,215

 
18,231

 
15,691

 
3,981

 
19,672

Florida
 
26,444

 
2,136

 
28,580

 
30,855

 
1,922

 
32,777

Texas
 
14,759

 
4,231

 
18,990

 
16,748

 
4,258

 
21,006

North
 
15,084

 
1,676

 
16,760

 
16,804

 
1,954

 
18,758

Southwest
 
35,090

 
698

 
35,788

 
40,284

 
548

 
40,832

Total
 
116,933

 
14,077

 
131,010

 
131,964

 
15,230

 
147,194

 
 
 
 
 
 
 
 
 
 
 
 
 
Developed (%)
 
28
%
 
38
%
 
29
%
 
30
%
 
39
%
 
31
%

27



Of our controlled lots, 116,933 and 131,964 were owned and 10,060 and 10,082 were under option agreements approved for purchase at December 31, 2011 and 2010, respectively. In addition, there were 4,017 and 5,148 lots under option agreements pending approval at December 31, 2011 and 2010, respectively. While we are purchasing land positions where it makes strategic and economic sense to do so, the reduction in lots resulting from closings, land disposition activity, and withdrawals from land option contracts exceeded the number of lots added by new transactions during the year ended December 31, 2011.
The remaining purchase price related to land under option for use by our Homebuilding operations at future dates approximated $698.0 million at December 31, 2011. These land option agreements, which may be canceled at our discretion, and may extend over several years, are secured by deposits and pre-acquisition costs totaling $57.0 million, of which only $4.6 million is refundable. This balance excludes contingent payment obligations which may or may not become actual obligations to us.
Non-GAAP Financial Measures
This report contains information about our home sale gross margins and selling, general, and administrative expenses (“SG&A”) reflecting certain adjustments. These measures are considered non-GAAP financial measures under the SEC's rules and should be considered in addition to, rather than as a substitute for, the comparable GAAP financial measures as measures of our operating performance. Management and our local divisions use these measures in evaluating the operating performance of each community and in making strategic decisions regarding sales pricing, construction and development pace, product mix, and other daily operating decisions. We believe they are relevant and useful measures to investors for evaluating our performance through (1) gross profit generated on homes delivered during a given period and (2) the efficiency of our overhead cost structure and for comparing our operating performance to other companies in the homebuilding industry. Although other companies in the homebuilding industry report similar information, the methods used may differ. We urge investors to understand the methods used by other companies in the homebuilding industry to calculate gross margins and SG&A and any adjustments thereto before comparing our measures to that of such other companies.
The following tables set forth reconciliations of these non-GAAP financial measures to the GAAP financial measures that management believes to be most directly comparable ($000's omitted):
Home sale gross margin
 
 
 
 
 
 
Years Ended December 31,
 
2011
 
2010
 
2009
Home sale revenues
$
3,950,743

 
$
4,419,812

 
$
3,869,297

Home sale cost of revenues
3,444,398

 
4,006,385

 
4,274,474

Home sale gross margin
506,345

 
413,427

 
(405,177
)
Add:
 
 
 
 
 
Land and community valuation adjustments (a)
$
10,498

 
$
141,592

 
$
683,014

Capitalized interest amortization (a)
189,382

 
180,918

 
165,355

Merger-related costs (b)
1,730

 
4,133

 
31,147

Adjusted home sale gross margin
$
707,955

 
$
740,070

 
$
474,339

 
 
 
 
 
 
Home sale gross margin as a percentage of home sale revenues
12.8
%
 
9.4
%
 
(10.5
)%
Adjusted home sale gross margin as a percentage of home sale revenues
17.9
%
 
16.7
%
 
12.3
 %
(a)
Write-offs of capitalized interest related to land and community valuation adjustments are reflected in capitalized interest amortization.
(b)
Home sale gross margin was adversely impacted by the amortization of a fair value adjustment to homes under construction inventory acquired with the Centex merger. This fair value adjustment is being amortized as an increase to home sale cost of revenues over the related home closings.

28



SG&A
 
 
 
 
 
 
Years Ended December 31,
 
2011
 
2010
 
2009
Home sale revenues
$
3,950,743

 
$
4,419,812

 
$
3,869,297

 
 
 
 
 
 
SG&A
$
519,583

 
$
895,102

 
$
672,434

Less: Insurance reserve adjustments (a)

 
280,390

 

SG&A excluding insurance reserve adjustments
$
519,583

 
$
614,712

 
$
672,434

 
 
 
 
 
 
SG&A as a percentage of home sale revenues
13.2
%
 
20.3
%
 
17.4
%
SG&A excluding insurance reserve adjustments as a percentage of home
   sale revenues
13.2
%
 
13.9
%
 
17.4
%
(a)
Adjustments to recorded insurance reserves, primarily related to general liability exposures.
Homebuilding Segment Operations
Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of homebuyers in our targeted markets. As of December 31, 2011, we conducted our operations in 61 markets located throughout 29 states. During 2011, we realigned our organizational structure and reportable segment presentation. Accordingly, the segment information provided herein has been reclassified to conform to the current presentation for all periods presented.
 
Northeast:
  
Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania,
Rhode Island, Virginia
Southeast:
  
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Texas:
 
Texas
North:
  
Illinois, Indiana, Michigan, Minnesota, Missouri, Northern California, Ohio, Oregon, Washington
Southwest:
  
Arizona, Colorado, Hawaii, Nevada, New Mexico, Southern California
As part of the change in presentation, we removed the "Other non-operating" distinction. Amounts previously classified within "Other non-operating" have been reclassified to "Other homebuilding."
We also have one reportable segment for our financial services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.


29



The following table presents selected financial information for our reportable Homebuilding segments:
 
 
Operating Data by Segment ($000's omitted)
 
Years Ended December 31,
 
2011
 
FY 2011 vs. FY 2010
 
2010
 
FY 2010 vs. FY 2009
 
2009
Home sale revenues:
 
 
 
 
 
 
 
 
 
Northeast
$
714,609

 
(5
)%
 
$
754,280

 
18
 %
 
$
640,595

Southeast
675,124

 
(10
)%
 
752,509

 
34
 %
 
561,187

Florida
557,865

 
3
 %
 
539,996

 
22
 %
 
444,161

Texas
615,319

 
(4
)%
 
638,424

 
34
 %
 
476,799

North
727,085

 
(16
)%
 
861,559

 
13
 %
 
763,851

Southwest
660,741

 
(24
)%
 
873,044

 
(11
)%
 
982,704

 
$
3,950,743

 
(11
)%
 
$
4,419,812

 
14
 %
 
$
3,869,297

Income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
Northeast
$
29,320

 
(15
)%
 
$
34,619

 
117
 %
 
$
(207,461
)
Southeast
45,060

 
92
 %
 
23,454

 
144
 %
 
(52,930
)
Florida
44,946

 
186
 %
 
(51,995
)
 
82
 %
 
(283,242
)
Texas
33,329

 
108
 %
 
16,026

 
126
 %
 
7,078

North
(12,376
)
 
(2,267
)%
 
571

 
100
 %
 
(120,998
)
Southwest
36,647

 
157
 %
 
(64,140
)
 
82
 %
 
(356,643
)
Other homebuilding (a)
(452,756
)
 
62
 %
 
(1,198,690
)
 
(32
)%
 
(905,885
)
 
$
(275,830
)
 
78
 %
 
$
(1,240,155
)
 
35
 %
 
$
(1,920,081
)
Closings (units):
 
 
 
 
 
 
 
 
 
Northeast
1,880

 
(10
)%
 
2,083

 
19
 %
 
1,748

Southeast
2,771

 
(10
)%
 
3,095

 
35
 %
 
2,296

Florida
2,251

 
1
 %
 
2,224

 
13
 %
 
1,962

Texas
3,327

 
(7
)%
 
3,563

 
36
 %
 
2,616

North
2,579

 
(16
)%
 
3,055

 
12
 %
 
2,733

Southwest
2,467

 
(20
)%
 
3,075

 
(16
)%
 
3,658

 
15,275

 
(11
)%
 
$
17,095

 
14
 %
 
15,013

Average selling price:
 
 
 
 
 
 
 
 
 
Northeast
$
380

 
5
 %
 
$
362

 
(1
)%
 
$
366

Southeast
244

 
0
 %
 
243

 
0
 %
 
244

Florida
248

 
2
 %
 
243

 
8
 %
 
226

Texas
185

 
3
 %
 
179

 
(2
)%
 
182

North
282

 
0
 %
 
282

 
1
 %
 
279

Southwest
268

 
(6
)%
 
284

 
6
 %
 
269

 
$
259

 
0
 %
 
$
259

 
0
 %
 
$
258

(a)
Other homebuilding includes the amortization of intangible assets, goodwill impairment, amortization of capitalized interest, net losses related to the redemption of debt, and other costs not allocated to the operating segments.


30



The following tables present additional selected financial information for our reportable Homebuilding segments:
 
 
 
Operating Data by Segment ($000's omitted)
 
 
Years Ended December 31,
 
 
2011
 
FY 2011 vs. FY 2010
 
2010
 
FY 2010 vs. FY 2009
 
2009
Net new orders - units:
 
 
 
 
 
 
 
 
 
 
Northeast
 
1,749

 
6
 %
 
1,650

 
(5
)%
 
1,731

Southeast
 
2,642

 
(4
)%
 
2,747

 
20
 %
 
2,297

Florida
 
2,314

 
13
 %
 
2,046

 
11
 %
 
1,850

Texas
 
3,278

 
5
 %
 
3,129

 
35
 %
 
2,322

North
 
2,635

 
(3
)%
 
2,716

 
14
 %
 
2,392

Southwest
 
2,597

 
(9
)%
 
2,860

 
(20
)%
 
3,593

 
 
15,215

 
0
 %
 
15,148

 
7
 %
 
14,185

Net new orders - dollars:
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
674,134

 
9
 %
 
$
617,899

 
(32
)%
 
$
904,103

Southeast
 
645,993

 
(3
)%
 
662,650

 
(10
)%
 
735,174

Florida
 
581,778

 
18
 %
 
494,587

 
(6
)%
 
523,798

Texas
 
606,239

 
6
 %
 
570,860

 
(13
)%
 
658,255

North
 
748,089

 
(1
)%
 
757,639

 
(18
)%
 
924,600

Southwest
 
697,596

 
(12
)%
 
795,315

 
(26
)%
 
1,070,127

 
 
$
3,953,829

 
1
 %
 
$
3,898,950

 
(19
)%
 
$
4,816,057

Cancellation rates:
 
 
 
 
 
 
 
 
 
 
Northeast
 
14
%
 
 
 
16
%
 
 
 
17
%
Southeast
 
16
%
 
 
 
16
%
 
 
 
21
%
Florida
 
13
%
 
 
 
11
%
 
 
 
21
%
Texas
 
28
%
 
 
 
29
%
 
 
 
28
%
North
 
17
%
 
 
 
17
%
 
 
 
22
%
Southwest
 
19
%
 
 
 
18
%
 
 
 
24
%
 
 
19
%
 
 
 
19
%
 
 
 
23
%
Unit backlog:
 
 
 
 
 
 
 
 
 
 
Northeast
 
425

 
(24
)%
 
556

 
(44
)%
 
989

Southeast
 
602

 
(18
)%
 
731

 
(32
)%
 
1,079

Florida
 
658

 
11
 %
 
595

 
(23
)%
 
773

Texas
 
825

 
(6
)%
 
874

 
(33
)%
 
1,308

North
 
709

 
9
 %
 
653

 
(34
)%
 
992

Southwest
 
705

 
23
 %
 
575

 
(27
)%
 
790

 
 
3,924

 
(2
)%
 
3,984

 
(33
)%
 
5,931

Backlog dollars:
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
178,934

 
(18
)%
 
$
219,409

 
(38
)%
 
$
355,789

Southeast
 
154,533

 
(16
)%
 
183,664

 
(33
)%
 
273,523

Florida
 
174,039

 
16
 %
 
150,126

 
(23
)%
 
195,534

Texas
 
153,927

 
(6
)%
 
163,007

 
(29
)%
 
230,571

North
 
207,507

 
11
 %
 
186,503

 
(36
)%
 
290,424

Southwest
 
190,709

 
24
 %
 
153,854

 
(34
)%
 
231,583

 
 
$
1,059,649

 
0
 %
 
$
1,056,563

 
(33
)%
 
$
1,577,424


31



The following table presents additional selected financial information for our reportable Homebuilding segments:
 
 
Operating Data by Segment ($000's omitted)
 
 
Years Ended December 31,
 
 
2011
 
FY 2011 vs. FY 2010
 
2010
 
FY 2010 vs. FY 2009
 
2009
Land-related charges*:
 
 
 
 
 
 
 
 
 
 
Northeast
 
$
4,958

 
17
 %
 
$
4,235

 
(98
)%
 
$
201,864

Southeast
 
2,429

 
(83
)%
 
14,141

 
(74
)%
 
54,205

Florida
 
3,999

 
(93
)%
 
56,833

 
(77
)%
 
250,250

Texas
 
828

 
(88
)%
 
6,814