0000822416-19-000048.txt : 20191022 0000822416-19-000048.hdr.sgml : 20191022 20191022160118 ACCESSION NUMBER: 0000822416-19-000048 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191022 DATE AS OF CHANGE: 20191022 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PULTEGROUP INC/MI/ CENTRAL INDEX KEY: 0000822416 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 382766606 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09804 FILM NUMBER: 191161744 BUSINESS ADDRESS: STREET 1: 3350 PEACHTREE ROAD NORTHEAST STREET 2: SUITE 150 CITY: ATLANTA STATE: 2Q ZIP: 30326 BUSINESS PHONE: (404) 978-6400 MAIL ADDRESS: STREET 1: 3350 PEACHTREE ROAD NORTHEAST STREET 2: SUITE 150 CITY: ATLANTA STATE: 2Q ZIP: 30326 FORMER COMPANY: FORMER CONFORMED NAME: PULTE HOMES INC/MI/ DATE OF NAME CHANGE: 20011023 FORMER COMPANY: FORMER CONFORMED NAME: PULTE CORP DATE OF NAME CHANGE: 19931118 FORMER COMPANY: FORMER CONFORMED NAME: PHM CORP DATE OF NAME CHANGE: 19920703 10-Q 1 phm930201910-q.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 
 OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


 
OF THE SECURITIES EXCHANGE ACT OF 1934



Commission File Number 1-9804

PULTEGROUP, INC.
(Exact name of registrant as specified in its charter) 
Michigan
38-2766606
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3350 Peachtree Road NE, Suite 150
Atlanta,
Georgia
30326
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:
Registrant’s telephone number, including area code:
404
978-6400

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Shares, par value $0.01
 
PHM
 
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]   NO  [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  [X]   NO  [ ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
YES
No
 
Number of common shares outstanding as of October 17, 2019: 270,999,901

1


PULTEGROUP, INC.
TABLE OF CONTENTS

 
 
Page
No.
PART I
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4

 
 
 
PART II
 
 
 
Item 2
 
 
 
Item 6
 
 
 
 
 





2


PART I. FINANCIAL INFORMATION

Item 1.      Financial Statements

PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)
 
 
September 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
 
 
 
 
 
 
 
Cash and equivalents
$
736,986

 
$
1,110,088

Restricted cash
31,658

 
23,612

Total cash, cash equivalents, and restricted cash
768,644

 
1,133,700

House and land inventory
7,830,059

 
7,253,353

Land held for sale
34,495

 
36,849

Residential mortgage loans available-for-sale
383,893

 
461,354

Investments in unconsolidated entities
62,182

 
54,590

Other assets
864,846

 
830,359

Intangible assets
128,592

 
127,192

Deferred tax assets, net
191,802

 
275,579

 
$
10,264,513

 
$
10,172,976

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
Accounts payable
$
389,843

 
$
352,029

Customer deposits
333,672

 
254,624

Accrued and other liabilities
1,327,241

 
1,360,483

Income tax liabilities
38,624

 
11,580

Financial Services debt
249,360

 
348,412

Notes payable
2,744,181

 
3,028,066

 
5,082,921

 
5,355,194

Shareholders' equity
5,181,592

 
4,817,782

 
$
10,264,513

 
$
10,172,976





See accompanying Notes to Condensed Consolidated Financial Statements.


3


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
Home sale revenues
$
2,637,002

 
$
2,572,236

 
$
6,990,417

 
$
6,933,888

Land sale and other revenues
8,548

 
25,510

 
40,993

 
104,971

 
2,645,550

 
2,597,746

 
7,031,410

 
7,038,859

Financial Services
64,815

 
51,620

 
164,634

 
150,322

Total revenues
2,710,365

 
2,649,366

 
7,196,044

 
7,189,181

 
 
 
 
 
 
 
 
Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
Home sale cost of revenues
(2,028,622
)
 
(1,954,160
)
 
(5,369,568
)
 
(5,276,232
)
Land sale cost of revenues
(7,350
)
 
(22,060
)
 
(35,615
)
 
(71,791
)
 
(2,035,972
)
 
(1,976,220
)
 
(5,405,183
)
 
(5,348,023
)
 
 
 
 
 
 
 
 
Financial Services expenses
(32,514
)
 
(32,213
)
 
(94,864
)
 
(96,650
)
Selling, general, and administrative expenses
(270,625
)
 
(252,757
)
 
(782,791
)
 
(719,706
)
Other expense, net
(5,108
)
 
(3,488
)
 
(9,581
)
 
(6,753
)
Income before income taxes
366,146

 
384,688

 
903,625

 
1,018,049

Income tax expense
(93,042
)
 
(95,153
)
 
(222,723
)
 
(233,674
)
Net income
$
273,104

 
$
289,535

 
$
680,902

 
$
784,375

 
 
 
 
 
 
 
 
Per share:
 
 
 
 
 
 
 
Basic earnings
$
0.99

 
$
1.01

 
$
2.44

 
$
2.72

Diluted earnings
$
0.99

 
$
1.01

 
$
2.44

 
$
2.71

Cash dividends declared
$
0.11

 
$
0.09

 
$
0.33

 
$
0.27

 
 
 
 
 
 
 
 
Number of shares used in calculation:



 
 
 
 
Basic
272,992

 
283,489

 
275,734

 
285,127

Effect of dilutive securities
640

 
1,183

 
858

 
1,301

Diluted
273,632

 
284,672

 
276,592

 
286,428




See accompanying Notes to Condensed Consolidated Financial Statements.


4


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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
273,104

 
$
289,535

 
$
680,902

 
$
784,375

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

 
25

 
75

 
75

Other comprehensive income
25

 
25

 
75

 
75

 
 
 
 
 
 
 
 
Comprehensive income
$
273,129

 
$
289,560

 
$
680,977

 
$
784,450






See accompanying Notes to Condensed Consolidated Financial Statements.


5



PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(000's omitted)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Retained
Earnings
 
Total
Shares
 
$
 
Shareholders' equity, June 30, 2019
274,975

 
$
2,750

 
$
3,225,874

 
$
(295
)
 
$
1,841,478

 
$
5,069,807

Stock option exercises
110

 
1

 
1,158

 

 

 
1,159

Share issuances
13

 

 

 

 

 

Dividends declared

 

 

 

 
(30,132
)
 
(30,132
)
Share repurchases
(4,127
)
 
(41
)
 

 

 
(135,876
)
 
(135,917
)
Cash paid for shares withheld for taxes

 

 

 

 
(372
)
 
(372
)
Share-based compensation

 

 
3,918

 

 

 
3,918

Net income

 

 

 

 
273,104

 
273,104

Other comprehensive income

 

 

 
25

 

 
25

Shareholders' equity, September 30, 2019
270,971

 
$
2,710

 
$
3,230,950

 
$
(270
)
 
$
1,948,202

 
$
5,181,592

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity, December 31, 2018
277,110

 
$
2,771

 
$
3,201,427

 
$
(345
)
 
$
1,613,929

 
$
4,817,782

Stock option exercises
544

 
5

 
6,362

 

 

 
6,367

Share issuances
987

 
10

 
5,790

 

 

 
5,800

Dividends declared

 

 

 

 
(91,595
)
 
(91,595
)
Share repurchases
(7,670
)
 
(76
)
 

 

 
(244,312
)
 
(244,388
)
Cash paid for shares withheld for taxes

 

 

 

 
(10,722
)
 
(10,722
)
Share-based compensation

 

 
17,371

 

 

 
17,371

Net income

 

 

 

 
680,902

 
680,902

Other comprehensive income

 

 

 
75

 

 
75

Shareholders' equity, September 30, 2019
270,971

 
$
2,710

 
$
3,230,950

 
$
(270
)
 
$
1,948,202

 
$
5,181,592



6


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(000's omitted)
(Unaudited)

 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Retained
Earnings
 
Total
Shares
 
$
 
Shareholders' equity, June 30, 2018
284,362

 
$
2,843

 
$
3,191,087

 
$
(395
)
 
$
1,333,176

 
$
4,526,711

Cumulative effect of accounting change

 

 

 

 

 

Stock option exercises
80

 
1

 
994

 

 

 
995

Share issuances
(6
)
 
1

 
(1
)
 

 

 

Dividends declared

 

 

 

 
(25,707
)
 
(25,707
)
Share repurchases
(2,369
)
 
(24
)
 

 

 
(66,924
)
 
(66,948
)
Cash paid for shares withheld for taxes

 

 

 

 

 

Share-based compensation

 

 
4,267

 

 

 
4,267

Net income

 

 

 

 
289,535

 
289,535

Other comprehensive income

 

 

 
25

 

 
25

Shareholders' equity, September 30, 2018
282,067

 
$
2,821

 
$
3,196,347

 
$
(370
)
 
$
1,530,080

 
$
4,728,878

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' equity, December 31, 2017
286,752

 
$
2,868

 
$
3,171,542

 
$
(445
)
 
$
980,061

 
$
4,154,026

Cumulative effect of accounting change (see Note 1)

 

 

 

 
22,411

 
22,411

Stock option exercises
514

 
5

 
5,457

 

 

 
5,462

Share issuances
611

 
6

 
3,474

 

 

 
3,480

Dividends declared

 

 

 

 
(77,673
)
 
(77,673
)
Share repurchases
(5,810
)
 
(58
)
 

 

 
(172,002
)
 
(172,060
)
Cash paid for shares withheld for taxes

 

 
(284
)
 

 
(7,092
)
 
(7,376
)
Share-based compensation

 

 
16,158

 

 

 
16,158

Net income

 

 

 

 
784,375

 
784,375

Other comprehensive income

 

 

 
75

 

 
75

Shareholders' equity, September 30, 2018
282,067

 
$
2,821


$
3,196,347


$
(370
)

$
1,530,080


$
4,728,878



See accompanying Notes to Condensed Consolidated Financial Statements.


7


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
680,902

 
$
784,375

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Deferred income tax expense
83,752

 
230,335

Land-related charges
17,549


13,973

Depreciation and amortization
40,302

 
36,717

Share-based compensation expense
21,389

 
21,521

Other, net
2,567

 
(3,466
)
Increase (decrease) in cash due to:
 
 
 
Inventories
(427,183
)
 
(263,734
)
Residential mortgage loans available-for-sale
76,813

 
218,900

Other assets
4,146

 
(22,117
)
Accounts payable, accrued and other liabilities
82,543

 
(1,524
)
Net cash provided by (used in) operating activities
582,780

 
1,014,980

Cash flows from investing activities:
 
 
 
Capital expenditures
(43,162
)
 
(46,529
)
Investments in unconsolidated entities
(8,515
)
 
(1,000
)
Business acquisition
(163,724
)
 

Other investing activities, net
5,009

 
15,545

Net cash provided by (used in) investing activities
(210,392
)
 
(31,984
)
Cash flows from financing activities:
 
 
 
Repayments of notes payable
(297,411
)
 
(82,655
)
Borrowings under revolving credit facility

 
1,566,000

Repayments under revolving credit facility

 
(1,566,000
)
Financial Services borrowings (repayments)
(99,052
)
 
(187,071
)
Debt issuance costs

 
(8,165
)
Stock option exercises
6,368

 
5,462

Share repurchases
(244,388
)
 
(172,060
)
Cash paid for shares withheld for taxes
(10,726
)
 
(7,379
)
Dividends paid
(92,235
)
 
(78,284
)
Net cash provided by (used in) financing activities
(737,444
)
 
(530,152
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
(365,056
)
 
452,844

Cash, cash equivalents, and restricted cash at beginning of period
1,133,700

 
306,168

Cash, cash equivalents, and restricted cash at end of period
$
768,644

 
$
759,012

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid (capitalized), net
$
19,569

 
$
16,747

Income taxes paid (refunded), net
$
60,329

 
$
88,544



See accompanying Notes to Condensed Consolidated Financial Statements.

8


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


1. Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States ("U.S."), and our common shares trade on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also engage in mortgage banking operations, conducted through Pulte Mortgage LLC (“Pulte Mortgage”), and title and insurance brokerage operations.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Use of estimates

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

Subsequent events

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

Business acquisition

In April 2019, we acquired the homebuilding operations of American West, located in Las Vegas, Nevada, for $163.7 million. The assets acquired included approximately 1,200 finished lots and control of approximately 2,300 additional lots through land option agreements. The acquired net assets were recorded at their estimated fair values, including $12.0 million associated with the American West tradename, which is being amortized over a 20-year life. The acquisition of these assets was not material to our results of operations or financial condition.

Other expense, net

Other expense, net consists of the following ($000’s omitted): 
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2019
 
2018
 
2019
 
2018
Write-offs of deposits and pre-acquisition costs
$
(2,455
)
 
$
(3,136
)
 
$
(7,888
)
 
$
(7,398
)
Amortization of intangible assets
(3,600
)
 
(3,450
)
 
(10,600
)
 
(10,350
)
Loss on debt retirement (see Note 4)

 

 
(4,843
)
 
(76
)
Interest income
3,554

 
1,842

 
12,974

 
3,240

Interest expense
(147
)
 
(152
)
 
(437
)
 
(460
)
Equity in earnings of unconsolidated entities
211

 
886

 
377

 
2,112

Miscellaneous, net
(2,671
)
 
522

 
836

 
6,179

Total other expense, net
$
(5,108
)
 
$
(3,488
)
 
$
(9,581
)
 
$
(6,753
)



9


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

Revenue recognition

Home sale revenues - Home sale revenues and related profit are generally recognized when title to and possession of the home are transferred to the buyer at the home closing date. Our performance obligation to deliver the agreed-upon home is generally satisfied at the home closing date. Home sale contract assets consist of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit and classified as cash. Contract liabilities include customer deposit liabilities related to sold but undelivered homes, which totaled $333.7 million and $254.6 million at September 30, 2019 and December 31, 2018, respectively. Substantially all of our home sales are scheduled to close and be recorded to revenue within one year from the date of receiving a customer deposit. See Note 8 for information on warranties and related obligations.

Land sale revenues - We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sales are generally outright sales of specified land parcels with cash consideration due on the closing date, which is generally when performance obligations are satisfied.

Financial services revenues - Loan origination fees, commitment fees, and certain direct loan origination costs are recognized as incurred. Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Mortgage servicing fees represent fees earned for servicing loans. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when related mortgage payments are received.

Revenues associated with our title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. Insurance brokerage commissions relate to commissions on homeowner and other insurance policies placed with third party carriers through various agency channels. Our performance obligations for policy renewal commissions are satisfied upon issuance of the initial policy, and related contract assets for estimated future renewal commissions are included in other assets and totaled $34.1 million at September 30, 2019.

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders (the “Numerator”) by the weighted-average number of common shares outstanding, adjusted for unvested shares (the “Denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the Denominator is increased to include the dilutive effects of stock options, unvested restricted shares, unvested restricted share units, and other potentially dilutive instruments. Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.

In accordance with Accounting Standards Codification ("ASC") 260, "Earnings Per Share", the two-class method determines earnings per share for each class of common stock and participating securities according to an earnings allocation formula that adjusts the Numerator for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. Our outstanding restricted share awards, restricted share units, and deferred shares are considered participating securities. The following table presents the earnings per common share (000's omitted, except per share data):

10


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

 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Net income
$
273,104

 
$
289,535

 
$
680,902

 
$
784,375

Less: earnings distributed to participating securities
(298
)
 
(279
)
 
(911
)
 
(874
)
Less: undistributed earnings allocated to participating securities
(2,411
)
 
(2,871
)
 
(6,075
)
 
(7,752
)
Numerator for basic earnings per share
$
270,395

 
$
286,385

 
$
673,916

 
$
775,749

Add back: undistributed earnings allocated to participating securities
2,411

 
2,871

 
6,075

 
7,752

Less: undistributed earnings reallocated to participating securities
(2,405
)
 
(2,859
)
 
(6,057
)
 
(7,724
)
Numerator for diluted earnings per share
$
270,401

 
$
286,397

 
$
673,934

 
$
775,777

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic shares outstanding
272,992

 
283,489

 
275,734

 
285,127

Effect of dilutive securities
640

 
1,183

 
858

 
1,301

Diluted shares outstanding
273,632

 
284,672

 
276,592

 
286,428

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.99

 
$
1.01

 
$
2.44

 
$
2.72

Diluted
$
0.99

 
$
1.01

 
$
2.44

 
$
2.71



Residential mortgage loans available-for-sale

Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. At September 30, 2019 and December 31, 2018, residential mortgage loans available-for-sale had an aggregate fair value of $383.9 million and $461.4 million, respectively, and an aggregate outstanding principal balance of $373.1 million and $444.2 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $0.6 million and $(0.7) million for the three months ended September 30, 2019 and 2018, respectively, and $(0.7) million and $(1.0) million for the nine months ended September 30, 2019 and 2018, respectively. These changes in fair value were substantially offset by changes in the fair value of corresponding hedging instruments. Net gains from the sale of mortgages were $36.3 million and $27.8 million for the three months ended September 30, 2019 and 2018, respectively, and $90.6 million and $83.9 million for the nine months ended September 30, 2019 and 2018, respectively, and have been included in Financial Services revenues.

Derivative instruments and hedging activities

We are party to interest rate lock commitments ("IRLCs") with customers resulting from our mortgage origination operations. At September 30, 2019 and December 31, 2018, we had aggregate IRLCs of $388.2 million and $285.0 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. We evaluate the creditworthiness of these transactions through our normal credit policies.

We hedge our exposure to interest rate market risk relating to residential mortgage loans available-for-sale and IRLCs using forward contracts on mortgage-backed securities, which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and whole loan investor commitments, which are obligations of an investor to buy loans at a specified price within a specified time period. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments we use to minimize market risk during the period from the time we extend an interest rate lock to a loan applicant until the time the loan is sold to an investor. At September 30, 2019 and December 31, 2018, we had unexpired forward contracts of $523.0 million and $511.0 million, respectively, and whole loan investor

11


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

commitments of $209.2 million and $187.8 million, respectively. Changes in the fair value of IRLCs and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable.

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on IRLCs and residential mortgage loans available-for-sale are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 60 days. The fair values of derivative instruments and their locations in the Condensed Consolidated Balance Sheets are summarized below ($000’s omitted):
 
 
September 30, 2019
 
December 31, 2018
 
Other Assets
 
Accrued and Other Liabilities
 
Other Assets
 
Accrued and Other Liabilities
Interest rate lock commitments
$
11,438

 
$
435

 
$
9,196

 
$
161

Forward contracts
1,035

 
1,099

 
315

 
7,229

Whole loan commitments
560

 
284

 
393

 
1,111

 
$
13,033

 
$
1,818

 
$
9,904

 
$
8,501



New accounting pronouncements

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

On January 1, 2018, we adopted ASC 606, "Revenue from Contracts with Customers", which requires revenue to be recognized in a manner to depict the transfer of goods or services and satisfaction of performance obligations to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. We applied the modified retrospective method to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the previous accounting standards. We recorded a net increase to opening retained earnings of $22.4 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact primarily related to the recognition of contract assets for insurance brokerage commission renewals. There was not a material impact to revenues as a result of applying ASC 606, and there were no significant changes to our business processes, systems, or internal controls as a result of implementing the standard.

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology. The standard is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted. We are currently evaluating the impact the standard will have on our financial statements.

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




12


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




2. Inventory

Major components of inventory were as follows ($000’s omitted): 
 
September 30,
2019
 
December 31,
2018
Homes under construction
$
3,144,251

 
$
2,630,158

Land under development
4,254,048

 
4,129,225

Raw land
431,760

 
493,970

 
$
7,830,059

 
$
7,253,353



We capitalize interest cost into inventory during the active development and construction of our communities. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Information related to interest capitalized into inventory is as follows ($000’s omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Interest in inventory, beginning of period
$
234,709

 
$
243,627

 
$
227,495

 
$
226,611

Interest capitalized
39,893

 
42,743

 
123,924

 
130,474

Interest expensed
(46,040
)
 
(43,583
)
 
(122,857
)
 
(114,298
)
Interest in inventory, end of period
$
228,562

 
$
242,787

 
$
228,562

 
$
242,787



Land option agreements

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

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. No VIEs required consolidation at either September 30, 2019 or December 31, 2018 because we determined that we were not the VIEs' primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements.


13


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

The following provides a summary of our interests in land option agreements as of September 30, 2019 and December 31, 2018 ($000’s omitted):
 
 
September 30, 2019
 
December 31, 2018
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
Land options with VIEs
$
120,490

 
$
1,238,526

 
$
90,717

 
$
1,079,507

Other land options
167,067

 
2,017,422

 
127,851

 
1,522,903

 
$
287,557

 
$
3,255,948

 
$
218,568

 
$
2,602,410



Land-related charges

We recorded the following land-related charges ($000's omitted):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
Statement of Operations Classification
2019
 
2018
 
2019
 
2018
Land impairments
Home sale cost of revenues
$
5,919

 
$
3,502

 
$
6,007

 
$
4,054

Net realizable value ("NRV") adjustments - land held for sale
Land sale cost of revenues
2,366

 
1,494

 
3,654

 
2,521

Write-offs of deposits and pre-acquisition costs
Other expense, net
2,455

 
3,136

 
7,888

 
7,398

 
 
$
10,740


$
8,132


$
17,549


$
13,973



Land impairments relate to communities that are either active or that we intend to eventually open and build out. On a quarterly basis, we review each of our land positions and perform detailed impairment calculations for communities that display indicators of potential impairment. We determine the fair value of a community's inventory using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the cash flow models are specific to each community and typically do not assume improvements in market conditions in the near term. The discount rate used in determining each community's fair value depends on the stage of development of the community and other specific factors that increase or decrease the inherent risks associated with the community's cash flow streams. Accordingly, determining the fair value of a community's inventory involves a number of variables, many of which are interrelated. The table below summarizes certain quantitative unobservable inputs utilized in determining the fair value of impaired communities during the nine months ended September 30, 2019 and 2018 ($000's omitted):
 
Communities Impaired
 
Fair Value of Communities Impaired, Net of Impairment Charges
 
Impairment Charges
 
Average Selling Price
 
Quarterly Sales Pace (homes)
 
Discount Rate
2019
2

 
$
2,610

 
$
6,007

 
$466 to $550
 
1 to 3
 
12% to 14%

2018
2

 
$
5,809

 
$
4,054

 
$512 to $586
 
3 to 4
 
12
%


As explained in Note 1, 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. NRVs occur when circumstances indicate that the carrying value of land held for sale will not be fully recovered.


14


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

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

3. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
Northeast:
 
Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia
Southeast:
 
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Midwest:
 
Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio
Texas:
 
Texas
West:
 
Arizona, California, Nevada, New Mexico, Washington


We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking and title operations and operate generally in the same markets as the Homebuilding segments.


15


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

 
Operating Data by Segment
($000’s omitted)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019