PHM 03/31/2014 10-Q
______________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
[ ] 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
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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]
Number of shares of common stock outstanding as of April 18, 2014: 378,651,879
______________________________________________________________________________________________________
PULTEGROUP, INC.
INDEX
|
| | |
| | Page No. |
PART I | | |
| | |
Item 1 | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2 | | |
| | |
Item 3 | | |
| | |
Item 4 | | |
| | |
PART II | | |
| | |
Item 2 | | |
| | |
Item 6 | | |
| | |
| | |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| (Unaudited) | | (Note) |
ASSETS | | | |
| | | |
Cash and equivalents | $ | 1,268,162 |
| | $ | 1,580,329 |
|
Restricted cash | 75,596 |
| | 72,715 |
|
House and land inventory | 4,034,294 |
| | 3,978,561 |
|
Land held for sale | 72,531 |
| | 61,735 |
|
Land, not owned, under option agreements | 22,200 |
| | 24,024 |
|
Residential mortgage loans available-for-sale | 209,921 |
| | 287,933 |
|
Investments in unconsolidated entities | 40,120 |
| | 45,323 |
|
Other assets | 461,046 |
| | 460,621 |
|
Intangible assets | 132,873 |
| | 136,148 |
|
Deferred tax assets, net | 2,034,668 |
| | 2,086,754 |
|
| $ | 8,351,411 |
| | $ | 8,734,143 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| | | |
Liabilities: | | | |
Accounts payable, including book overdrafts of $26,732 and $35,827 in 2014 and 2013, respectively | $ | 205,234 |
| | $ | 202,736 |
|
Customer deposits | 168,573 |
| | 134,858 |
|
Accrued and other liabilities | 1,257,854 |
| | 1,377,750 |
|
Income tax liabilities | 205,810 |
| | 206,015 |
|
Financial Services debt | 35,836 |
| | 105,664 |
|
Senior notes | 1,814,041 |
| | 2,058,168 |
|
| 3,687,348 |
| | 4,085,191 |
|
| | | |
Shareholders' equity | 4,664,063 |
| | 4,648,952 |
|
| | | |
| $ | 8,351,411 |
| | $ | 8,734,143 |
|
Note: The Condensed Consolidated Balance Sheet at December 31, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Revenues: | | | |
Homebuilding | | | |
Home sale revenues | $ | 1,088,015 |
| | $ | 1,099,752 |
|
Land sale revenues | 5,984 |
| | 26,131 |
|
| 1,093,999 |
| | 1,125,883 |
|
Financial Services | 24,895 |
| | 36,873 |
|
Total revenues | 1,118,894 |
| | 1,162,756 |
|
| | | |
Homebuilding Cost of Revenues: | | | |
Home sale cost of revenues | 828,603 |
| | 901,470 |
|
Land sale cost of revenues | 5,011 |
| | 22,018 |
|
| 833,614 |
| | 923,488 |
|
Financial Services expenses | 3,322 |
| | 22,588 |
|
Selling, general and administrative expenses | 144,887 |
| | 129,626 |
|
Other expense, net | 13,831 |
| | 4,772 |
|
Interest income | (1,111 | ) | | (1,173 | ) |
Interest expense | 213 |
| | 207 |
|
Equity in (earnings) loss of unconsolidated entities | (5,891 | ) | | 898 |
|
Income before income taxes | 130,029 |
| | 82,350 |
|
Income tax expense | 55,210 |
| | 588 |
|
Net income | $ | 74,819 |
| | $ | 81,762 |
|
| | | |
Per share: | | | |
Basic earnings | $ | 0.19 |
| | $ | 0.21 |
|
Diluted earnings | $ | 0.19 |
| | $ | 0.21 |
|
Cash dividends declared | $ | 0.05 |
| | $ | — |
|
| | | |
Number of shares used in calculation: |
|
|
|
Basic | 383,991 |
|
| 384,228 |
|
Effect of dilutive securities | 3,815 |
|
| 6,093 |
|
Diluted | 387,806 |
|
| 390,321 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000’s omitted)
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Net income | $ | 74,819 |
| | $ | 81,762 |
|
| | | |
Other comprehensive income, net of tax: | | | |
Change in value of derivatives | 40 |
| | 48 |
|
Other comprehensive income | 40 |
| | 48 |
|
| | | |
Comprehensive income | $ | 74,859 |
| | $ | 81,810 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(000's omitted, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings (Accumulated Deficit) | | Total |
Shares | | $ | |
Shareholders' Equity, January 1, 2014 | 381,300 |
| | $ | 3,813 |
| | $ | 3,052,016 |
| | $ | (795 | ) | | $ | 1,593,918 |
| | $ | 4,648,952 |
|
Stock option exercises | 489 |
| | 5 |
| | 5,290 |
| | — |
| | — |
| | 5,295 |
|
Stock awards, net of cancellations | (99 | ) | | (1 | ) | | 1 |
| | — |
| | — |
| | — |
|
Dividends declared | — |
| | — |
| | — |
| | — |
| | (19,087 | ) | | (19,087 | ) |
Stock repurchases | (2,511 | ) | | (25 | ) | | — |
| | — |
| | (50,080 | ) | | (50,105 | ) |
Stock-based compensation | — |
| | — |
| | 4,191 |
| | — |
| | — |
| | 4,191 |
|
Excess tax benefits (deficiencies) from share-based awards | — |
| | — |
| | (42 | ) | | — |
| | — |
| | (42 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 74,819 |
| | 74,819 |
|
Other comprehensive income | — |
| | — |
| | — |
| | 40 |
| | — |
| | 40 |
|
Shareholders' Equity, March 31, 2014 | 379,179 |
| | $ | 3,792 |
| | $ | 3,061,456 |
| | $ | (755 | ) | | $ | 1,599,570 |
| | $ | 4,664,063 |
|
| | | | | | | | | | | |
Shareholders' Equity, January 1, 2013 | 386,608 |
| | $ | 3,866 |
| | $ | 3,030,889 |
| | $ | (992 | ) | | $ | (844,147 | ) | | $ | 2,189,616 |
|
Stock option exercises | 669 |
| | 7 |
| | 7,530 |
| | — |
| | — |
| | 7,537 |
|
Stock awards, net of cancellations | 563 |
| | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
Stock repurchases | (330 | ) | | (3 | ) | | (2,587 | ) | | — |
| | (3,837 | ) | | (6,427 | ) |
Stock-based compensation | — |
| | — |
| | 2,979 |
| | — |
| | — |
| | 2,979 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 81,762 |
| | 81,762 |
|
Other comprehensive income | — |
| | — |
| | — |
| | 48 |
| | — |
| | 48 |
|
Shareholders' Equity, March 31 2013 | 387,510 |
| | $ | 3,875 |
| | $ | 3,038,806 |
| | $ | (944 | ) | | $ | (766,222 | ) | | $ | 2,275,515 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Cash flows from operating activities: | | | |
Net income | $ | 74,819 |
| | $ | 81,762 |
|
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: | | | |
Deferred income tax expense | 52,086 |
| | — |
|
Depreciation and amortization | 5,670 |
| | 7,339 |
|
Stock-based compensation expense | 8,522 |
| | 7,141 |
|
Equity in (earnings) loss of unconsolidated entities | (5,891 | ) | | 898 |
|
Distributions of earnings from unconsolidated entities | 4,753 |
| | 265 |
|
Loss on debt retirements | 8,584 |
| | — |
|
Other non-cash, net | 3,256 |
| | 3,035 |
|
Increase (decrease) in cash due to: | | | |
Restricted cash | (890 | ) | | 860 |
|
Inventories | (68,812 | ) | | 99,760 |
|
Residential mortgage loans available-for-sale | 76,357 |
| | 80,727 |
|
Other assets | 17,090 |
| | (370 | ) |
Accounts payable, accrued and other liabilities | (83,943 | ) | | (8,795 | ) |
Income tax liabilities | (205 | ) | | (2,002 | ) |
Net cash provided by (used in) operating activities | 91,396 |
| | 270,620 |
|
Cash flows from investing activities: | | | |
Distributions from unconsolidated entities | 6,385 |
| | 200 |
|
Investments in unconsolidated entities | (9 | ) | | (593 | ) |
Net change in loans held for investment | (6,390 | ) | | 10 |
|
Change in restricted cash related to letters of credit | (1,991 | ) | | 4,513 |
|
Proceeds from the sale of property and equipment | 23 |
| | 59 |
|
Capital expenditures | (17,865 | ) | | (5,378 | ) |
Net cash provided by (used in) investing activities | (19,847 | ) | | (1,189 | ) |
Cash flows from financing activities: | | | |
Financial Services borrowings (repayments) | (69,828 | ) | | (82,164 | ) |
Other borrowings (repayments) | (250,013 | ) | | (213 | ) |
Stock option exercises | 5,295 |
| | 7,537 |
|
Stock repurchases | (50,105 | ) | | (6,427 | ) |
Dividends paid | (19,065 | ) | | — |
|
Net cash provided by (used in) financing activities | (383,716 | ) | | (81,267 | ) |
Net increase (decrease) in cash and equivalents | (312,167 | ) | | 188,164 |
|
Cash and equivalents at beginning of period | 1,580,329 |
| | 1,404,760 |
|
Cash and equivalents at end of period | $ | 1,268,162 |
| | $ | 1,592,924 |
|
| | | |
Supplemental Cash Flow Information: | | | |
Interest paid (capitalized), net | $ | (19,556 | ) | | $ | (23,095 | ) |
Income taxes paid (refunded), net | $ | (8,253 | ) | | $ | (3,026 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of significant accounting policies
Basis of presentation
PulteGroup, Inc. is 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.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles 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 United States generally accepted accounting principles 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, 2013.
Use of estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 ("SEC").
Cash and equivalents
Cash and equivalents include institutional money market investments and time deposits with a maturity of three months or less when acquired. Cash and equivalents at March 31, 2014 and December 31, 2013 also included $11.8 million and $3.7 million, respectively, of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit.
Restricted cash
We maintain certain cash balances that are restricted as to their use. Restricted cash consists primarily of deposits maintained with financial institutions under certain cash-collateralized letter of credit agreements (see Note 8). The remaining balances relate to certain other accounts with restrictions, including customer deposits on home sales that are temporarily restricted by regulatory requirements until title transfers to the homebuyer.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other expense, net
Other expense, net consists of the following ($000’s omitted):
|
| | | | | | | |
| Three Months Ended |
March 31, |
2014 | | 2013 |
Write-off of deposits and pre-acquisition costs | $ | 1,464 |
| | $ | 341 |
|
Loss on debt retirements (Note 8) | 8,584 |
| | — |
|
Amortization of intangible assets | 3,275 |
| | 3,275 |
|
Miscellaneous expense, net | 508 |
| | 1,156 |
|
| $ | 13,831 |
| | $ | 4,772 |
|
Notes receivable
In certain instances, we may accept consideration for land sales or other transactions in the form of a note receivable. Such receivables are reported net of allowance for credit losses within other assets. The following represents our notes receivable and related allowance for credit losses ($000’s omitted):
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
Notes receivable, gross | $ | 56,827 |
| | $ | 59,995 |
|
Allowance for credit losses | (27,054 | ) | | (27,051 | ) |
Notes receivable, net | $ | 29,773 |
| | $ | 32,944 |
|
We also record other receivables from various parties in the normal course of business, including amounts due from municipalities, insurance companies, and vendors. Such receivables are generally reported in other assets. See Residential mortgage loans available-for-sale in Note 1 for a discussion of our receivables related to mortgage operations.
Earnings per share
Basic earnings per share is computed by dividing income (loss) available to common shareholders (the “Numerator”) by the weighted-average number of common shares, 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 stock and restricted stock units, and other potentially dilutive instruments. Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation. Our earnings per share excluded 7.5 million and 10.0 million stock options and other potentially dilutive instruments for the three months ended March 31, 2014 and 2013, respectively.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In accordance with ASC 260 "Earnings Per Share" ("ASC 260"), 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. The Company's outstanding restricted stock awards, restricted stock units, and deferred shares are considered participating securities. The following table presents the earnings per share of common stock (000's omitted, except per share data):
|
| | | | | | | |
| Three Months Ended |
March 31, |
2014 | | 2013 |
Numerator: | | | |
Net income | $ | 74,819 |
| | $ | 81,762 |
|
Less: earnings distributed to participating securities | (134 | ) | | — |
|
Less: undistributed earnings allocated to participating securities | (383 | ) | | — |
|
Numerator for basic earnings per share | $ | 74,302 |
| | $ | 81,762 |
|
Add back: undistributed earnings allocated to participating securities | 383 |
| | — |
|
Less: undistributed earnings reallocated to participating securities | (379 | ) | | — |
|
Numerator for diluted earnings per share | $ | 74,306 |
| | $ | 81,762 |
|
| | | |
Denominator: | | | |
Basic shares outstanding | 383,991 |
| | 384,228 |
|
Effect of dilutive securities | 3,815 |
| | 6,093 |
|
Diluted shares outstanding | 387,806 |
| | 390,321 |
|
| | | |
Earnings per share: | | | |
Basic | $ | 0.19 |
| | $ | 0.21 |
|
Diluted | $ | 0.19 |
| | $ | 0.21 |
|
Land option agreements
In the ordinary course of business, 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. See Note 2.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
If the entity holding the land under option is a variable interest entity (“VIE”), our deposit represents a variable interest in that entity. If we are determined to be the primary beneficiary of the VIE, we are required to consolidate the VIE. Certain of our land option agreements are with entities considered VIEs. In evaluating whether we are required to consolidate a VIE, we take into consideration that the VIE is generally protected from the first dollar of loss under our land option agreement due to our deposit. Likewise, the VIE's gains are generally capped based on the purchase price within the land option agreement. However, we generally have little control or influence over the operations of these VIEs due to our lack of an equity interest in them. Additionally, creditors of the VIE typically have no recourse against us, and we do not provide financial or other support to these VIEs other than as stipulated in the land option agreements. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the applicable land option agreements. Historically, cancellations of land option agreements have resulted in write-offs of the related deposits and pre-acquisition costs but have not exposed us to the overall risks or losses of the applicable VIEs. No VIEs required consolidation at either March 31, 2014 or December 31, 2013.
Separately, certain land option agreements represent financing arrangements even though we generally have no obligation to pay these future amounts. As a result, we recorded $22.2 million and $24.0 million at March 31, 2014 and December 31, 2013, respectively, to land, not owned, under option agreements with a corresponding increase to accrued and other liabilities. Such amounts represent the remaining purchase price under the land option agreements, some of which are with VIEs, in the event we exercise the purchase rights under the agreements.
The following provides a summary of our interests in land option agreements as of March 31, 2014 and December 31, 2013 ($000’s omitted):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| Deposits and Pre-acquisition Costs | | Remaining Purchase Price | | Land, Not Owned, Under Option Agreements | | Deposits and Pre-acquisition Costs | | Remaining Purchase Price | | Land, Not Owned, Under Option Agreements |
Land options with VIEs | $ | 51,055 |
| | $ | 791,765 |
| | $ | 5,264 |
| | $ | 40,486 |
| | $ | 661,158 |
| | $ | 8,167 |
|
Other land options | 47,731 |
| | 801,584 |
| | 16,936 |
| | 50,548 |
| | 729,128 |
| | 15,857 |
|
| $ | 98,786 |
| | $ | 1,593,349 |
| | $ | 22,200 |
| | $ | 91,034 |
| | $ | 1,390,286 |
| | $ | 24,024 |
|
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. In accordance with ASC 825, “Financial Instruments” (“ASC 825”), we use the fair value option to record residential mortgage loans available-for-sale. Election of the fair value option for these loans allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. We do not designate any derivative instruments as hedges or apply the hedge accounting provisions of ASC 815, “Derivatives and Hedging.”
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. At March 31, 2014 and December 31, 2013, residential mortgage loans available-for-sale had an aggregate fair value of $209.9 million and $287.9 million, respectively, and an aggregate outstanding principal balance of $203.7 million and $278.1 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $0.7 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively. These changes in fair value were substantially offset by changes in fair value of the corresponding hedging instruments. Net gains from the sale of mortgages were $12.9 million and $23.9 million for the three months ended March 31, 2014 and 2013, respectively, and have been included in Financial Services revenues.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Derivative instruments and hedging activities
We are exposed to market risks from commitments to lend, movements in interest rates, and canceled or modified commitments to lend. A commitment to lend at a specific interest rate (an interest rate lock commitment) is a derivative financial instrument (interest rate is locked to the borrower). In order to reduce these risks, we use other derivative financial instruments, principally cash forward placement contracts on mortgage-backed securities and whole loan investor commitments, to economically hedge the interest rate lock commitment. We enter into these derivative financial instruments based upon our portfolio of interest rate lock commitments and closed loans. We do not use any derivative financial instruments for trading purposes.
At March 31, 2014 and December 31, 2013, we had aggregate interest rate lock commitments of $188.8 million and $175.7 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.
Forward contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price that may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. 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. We also use whole loan investor commitments, which are obligations of the investor to buy loans at a specified price within a specified time period. At March 31, 2014 and December 31, 2013, we had unexpired forward contracts of $338.1 million and $381.5 million, respectively, and whole loan investor commitments of $20.5 million and $31.7 million, respectively. Changes in the fair value of interest rate lock commitments 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 interest rate lock commitments 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 75 days.
The fair values of derivative instruments and their location in the Condensed Consolidated Balance Sheets is summarized below ($000’s omitted):
|
| | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| Other Assets | | Other Liabilities | | Other Assets | | Other Liabilities |
Interest rate lock commitments | $ | 4,474 |
| | $ | 253 |
| | $ | 3,628 |
| | $ | 489 |
|
Forward contracts | 562 |
| | 281 |
| | 4,374 |
| | 34 |
|
Whole loan commitments | 71 |
| | 41 |
| | 189 |
| | 84 |
|
| $ | 5,107 |
| | $ | 575 |
| | $ | 8,191 |
| | $ | 607 |
|
New accounting pronouncements
In January 2014, the FASB issued ASU 2014-04, “Receivables - Troubled Debt Restructurings by Creditors,” which clarifies when an in substance repossession or foreclosure of residential real estate property collateralizing a consumer mortgage loan has occurred. By doing so, this guidance helps determine when the creditor should derecognize the loan receivable and recognize the real estate property. The guidance is effective for the Company beginning January 1, 2015 and is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Inventory and land held for sale
Major components of inventory were as follows ($000’s omitted):
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
Homes under construction | $ | 1,115,281 |
| | $ | 1,042,147 |
|
Land under development | 2,157,677 |
| | 2,189,387 |
|
Raw land | 761,336 |
| | 747,027 |
|
| $ | 4,034,294 |
| | $ | 3,978,561 |
|
We capitalize interest cost into inventory during the active development and construction of our communities. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is recorded based on the timing of home closings. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels.
Information related to interest capitalized into inventory is as follows ($000’s omitted):
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Interest in inventory, beginning of period | $ | 230,922 |
| | $ | 331,880 |
|
Interest capitalized | 35,313 |
| | 42,656 |
|
Interest expensed | (40,616 | ) | | (53,677 | ) |
Interest in inventory, end of period | $ | 225,619 |
| | $ | 320,859 |
|
Interest incurred (a) | $ | 35,313 |
| | $ | 42,656 |
|
| |
(a) | Homebuilding interest incurred includes interest on senior debt and certain other financing arrangements. |
Land impairments
We record land impairment valuation adjustments to our communities within Homebuilding home sale cost of revenues. Our evaluations for impairments are based on our best estimates of the future cash flows of our communities. However, if conditions in our local markets worsen in the future or if our strategy related to certain communities changes, we may be required to evaluate our assets for further impairments or write-downs. There were no significant impairments during the three months ended March 31, 2014 or 2013.
Land held for sale
Land held for sale was as follows ($000’s omitted):
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
Land held for sale, gross | $ | 80,832 |
| | $ | 70,003 |
|
Net realizable value reserves | (8,301 | ) | | (8,268 | ) |
Land held for sale, net | $ | 72,531 |
| | $ | 61,735 |
|
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Segment information
Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
|
| | |
Northeast: | | Connecticut, 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, Nevada, New Mexico, Southern California |
We also have a 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.
Evaluation of segment performance is generally based on income before income taxes. Each reportable segment generally follows the same accounting policies described in Note 1 - "Summary of Significant Accounting Policies" to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | |
| Operating Data by Segment ($000’s omitted) |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Revenues: | | | |
Northeast | $ | 141,016 |
| | $ | 132,756 |
|
Southeast | 182,548 |
| | 169,926 |
|
Florida | 190,292 |
| | 151,883 |
|
Texas | 174,841 |
| | 190,043 |
|
North | 241,011 |
| | 225,806 |
|
Southwest | 164,291 |
| | 255,469 |
|
| 1,093,999 |
| | 1,125,883 |
|
Financial Services | 24,895 |
| | 36,873 |
|
Consolidated revenues | $ | 1,118,894 |
| | $ | 1,162,756 |
|
| | | |
Income (loss) before income taxes: | | | |
Northeast | $ | 17,495 |
| | $ | 12,072 |
|
Southeast | 25,479 |
| | 18,328 |
|
Florida | 34,356 |
| | 20,280 |
|
Texas | 22,982 |
| | 21,210 |
|
North | 30,740 |
| | 20,552 |
|
Southwest | 28,562 |
| | 33,791 |
|
Other homebuilding (a) | (51,179 | ) | | (58,196 | ) |
| 108,435 |
| | 68,037 |
|
Financial Services | 21,594 |
| | 14,313 |
|
Consolidated income before income taxes | $ | 130,029 |
| | $ | 82,350 |
|
| |
(a) | Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. Other homebuilding also included losses on debt retirements totaling $8.6 million for the three months ended March 31, 2014. |
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| Operating Data by Segment |
| ($000's omitted) |
| March 31, 2014 |
| Homes Under Construction | | Land Under Development | | Raw Land | | Total Inventory | | Total Assets |
Northeast | $ | 214,408 |
| | $ | 298,629 |
| | $ | 107,172 |
| | $ | 620,209 |
| | $ | 712,449 |
|
Southeast | 157,838 |
| | 292,298 |
| | 126,918 |
| | 577,054 |
| | 610,859 |
|
Florida | 141,975 |
| | 292,471 |
| | 128,699 |
| | 563,145 |
| | 644,461 |
|
Texas | 136,848 |
| | 231,944 |
| | 66,044 |
| | 434,836 |
| | 489,176 |
|
North | 260,923 |
| | 328,451 |
| | 80,654 |
| | 670,028 |
| | 747,080 |
|
Southwest | 168,866 |
| | 525,917 |
| | 201,899 |
| | 896,682 |
| | 967,288 |
|
Other homebuilding (a) | 34,423 |
| | 187,967 |
| | 49,950 |
| | 272,340 |
| | 3,897,604 |
|
| 1,115,281 |
| | 2,157,677 |
| | 761,336 |
| | 4,034,294 |
| | 8,068,917 |
|
Financial Services | — |
| | — |
| | — |
| | — |
| | 282,494 |
|
| $ | 1,115,281 |
| | $ | 2,157,677 |
| | $ | 761,336 |
| | $ | 4,034,294 |
| | $ | 8,351,411 |
|
| | | | | | | | | |
| December 31, 2013 |
| Homes Under Construction | | Land Under Development | | Raw Land | | Total Inventory | | Total Assets |
Northeast | $ | 212,611 |
| | $ | 325,241 |
| | $ | 106,681 |
| | $ | 644,533 |
| | $ | 731,259 |
|
Southeast | 139,484 |
| | 274,981 |
| | 146,617 |
| | 561,082 |
| | 599,271 |
|
Florida | 140,366 |
| | 295,631 |
| | 104,766 |
| | 540,763 |
| | 618,449 |
|
Texas | 130,398 |
| | 223,979 |
| | 57,480 |
| | 411,857 |
| | 466,198 |
|
North | 227,537 |
| | 350,239 |
| | 78,945 |
| | 656,721 |
| | 716,239 |
|
Southwest | 159,350 |
| | 512,164 |
| | 201,659 |
| | 873,173 |
| | 940,462 |
|
Other homebuilding (a) | 32,401 |
| | 207,152 |
| | 50,879 |
| | 290,432 |
| | 4,334,591 |
|
| 1,042,147 |
| | 2,189,387 |
| | 747,027 |
| | 3,978,561 |
| | 8,406,469 |
|
Financial Services | — |
| | — |
| | — |
| | — |
| | 327,674 |
|
| $ | 1,042,147 |
| | $ | 2,189,387 |
| | $ | 747,027 |
| | $ | 3,978,561 |
| | $ | 8,734,143 |
|
| |
(a) | Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments. |
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. Investments in unconsolidated entities
We participate in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop, and/or sell land and homes. A summary of our joint ventures is presented below ($000’s omitted):
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
Investments in joint ventures with debt non-recourse to PulteGroup | $ | 26,510 |
| | $ | 26,532 |
|
Investments in other active joint ventures | 13,610 |
| | 18,791 |
|
Total investments in unconsolidated entities | $ | 40,120 |
| | $ | 45,323 |
|
| | | |
Total joint venture debt | $ | 16,890 |
| | $ | 12,408 |
|
| | | |
PulteGroup proportionate share of joint venture debt: | | | |
Joint venture debt with limited recourse guaranties | $ | 875 |
| | $ | 750 |
|
Joint venture debt non-recourse to PulteGroup | 5,655 |
| | 3,654 |
|
PulteGroup's total proportionate share of joint venture debt | $ | 6,530 |
| | $ | 4,404 |
|
We recognized (income) expense from unconsolidated joint ventures of $(5.9) million and $0.9 million during the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014 and 2013, we made capital contributions of $0.0 million and $0.6 million, respectively, and received capital and earnings distributions of $11.1 million and $0.5 million, respectively.
The timing of cash obligations under the joint venture and any related financing agreements varies by agreement. If additional capital contributions are required and approved, we would need to contribute our pro rata portion of those capital needs in order to not dilute our ownership in the joint ventures. While future capital contributions may be required, we believe the total amount of such contributions will be limited. Our maximum financial loss exposure related to joint ventures is unlikely to exceed the combined investment and limited recourse guaranty totals.
5. Shareholders’ equity
We reinstated our quarterly cash dividend in July 2013. During the three months ended March 31, 2014, we declared a cash dividend of $0.05 per common share paid in April 2014.
During the three months ended March 31, 2014, we repurchased 2.2 million shares under our repurchase authorization for a total of $44.6 million. Such repurchases are reflected as a reduction of common stock and retained earnings. At March 31, 2014, we had remaining authorization to repurchase $189.7 million of common shares.
Under our stock-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of shares, generally related to the payment of minimum tax obligations. During the three months ended March 31, 2014 and 2013, employees surrendered shares valued at $5.5 million and $6.4 million, respectively, under these plans. Such share transactions are excluded from the above noted stock repurchase authorization.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Income taxes
Our effective tax rate is affected by a number of factors, the most significant of which are the valuation allowance related to our deferred tax assets, changes to tax laws or other circumstances that impact the value of our deferred tax assets, and changes in our unrecognized tax benefits. Due to the effects of these factors, our effective tax rate in 2013 was not correlated to the amount of our income or loss before income taxes. Our tax provision for the first quarter of 2014 reflects a more normalized effective tax rate while our tax provision for the first quarter of 2013 consisted primarily of changes in our unrecognized tax benefits.
We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. housing industry and broader economy. Based on our evaluation through June 30, 2013, we fully reserved our net deferred tax assets due to the uncertainty of their realization. At September 30, 2013, we evaluated evidence related to the need for a valuation allowance against our deferred tax assets and determined that the valuation allowance against substantially all of our federal deferred tax assets and a significant portion of our state deferred tax assets was no longer required. Accordingly, we reversed $2.1 billion of valuation allowance in the third quarter of 2013.
The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time. Certain states enacted changes to tax laws that impacted the value of our deferred tax assets in the first quarter of 2014. The estimated impact of such changes was recorded to income tax expense during the period.
Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. At March 31, 2014, we had $173.3 million of gross unrecognized tax benefits and $34.4 million of related accrued interest and penalties. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $141.5 million, excluding interest and penalties, primarily due to expirations of certain statutes of limitations and potential settlements.
We are currently under examination by the IRS and various state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The final outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2004 to 2014.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Fair value disclosures
ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows:
|
| | |
Level 1 | | Fair value determined based on quoted prices in active markets for identical assets or liabilities. |
| |
Level 2 | | Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active. |
| |
Level 3 | | Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques. |
Our assets and liabilities measured or disclosed at fair value are summarized below ($000’s omitted):
|
| | | | | | | | | | |
Financial Instrument | | Fair Value Hierarchy | | Fair Value |
March 31, 2014 | | December 31, 2013 |
| | | | | | |
Measured at fair value on a recurring basis: | | | | | | |
Residential mortgage loans available-for-sale | | Level 2 | | $ | 209,921 |
| | $ | 287,933 |
|
Interest rate lock commitments | | Level 2 | | 4,221 |
| | 3,139 |
|
Forward contracts | | Level 2 | | 281 |
| | 4,340 |
|
Whole loan commitments | | Level 2 | | 30 |
| | 105 |
|
| | | | | | |
Measured at fair value on a non-recurring basis: | | | | | | |
House and land inventory | | Level 3 | | $ | — |
| | $ | — |
|
| | | | | | |
Disclosed at fair value: | | | | | | |
Cash and equivalents (including restricted cash) | | Level 1 | | $ | 1,343,758 |
| | $ | 1,653,044 |
|
Financial Services debt | | Level 2 | | 35,836 |
| | 105,664 |
|
Senior notes | | Level 2 | | 1,891,326 |
| | 2,070,744 |
|
Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. Fair values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. Forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan investor commitments are based on market prices for similar instruments from the specific whole loan investor.
Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates. See Note 2 for a more detailed discussion of the valuation methods used for inventory.
The carrying amounts of cash and equivalents and Financial Services debt approximate their fair values due to their short-term nature. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $1.8 billion at March 31, 2014 and $2.1 billion at December 31, 2013.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Debt
Our senior notes are summarized as follows ($000’s omitted):
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
5.20% unsecured senior notes due February 2015 (a) | $ | — |
| | $ | 95,633 |
|
5.25% unsecured senior notes due June 2015 (a) | 233,926 |
| | 233,085 |
|
6.50% unsecured senior notes due May 2016 (a) | 460,189 |
| | 459,581 |
|
7.625% unsecured senior notes due October 2017 (b) | 122,685 |
| | 122,663 |
|
7.875% unsecured senior notes due June 2032 (a) | 299,207 |
| | 299,196 |
|
6.375% unsecured senior notes due May 2033 (a) | 398,585 |
| | 398,567 |
|
6.00% unsecured senior notes due February 2035 (a) | 299,449 |
| | 299,443 |
|
7.375% unsecured senior notes due June 2046 (a) | — |
| | 150,000 |
|
Total senior notes – carrying value (c) | $ | 1,814,041 |
| | $ | 2,058,168 |
|
Estimated fair value | $ | 1,891,326 |
| | $ | 2,070,744 |
|
| |
(a) | Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries. |
| |
(b) | Not redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries. |
| |
(c) | The recorded carrying value reflects the impact of various discounts and premiums that are amortized to interest cost over the respective terms of the senior notes. |
Debt retirement
During the three months ended March 31, 2014, we retired prior to their scheduled maturity dates $245.7 million of senior notes. We recorded losses related to these transactions totaling $8.6 million during the three months ended March 31, 2014. Losses on these transactions include the write-off of unamortized discounts, premiums, and transaction fees and are reflected in other expense, net.
Letter of credit facilities
We maintain separate cash-collateralized letter of credit agreements with a number of financial institutions. Letters of credit totaling $62.4 million and $58.7 million were outstanding under these agreements at March 31, 2014 and December 31, 2013, respectively. Under these agreements, we are required to maintain deposits with the respective financial institutions in amounts approximating the letters of credit outstanding. Such deposits are included in restricted cash. We also maintain an unsecured letter of credit facility with a bank that expires in September 2014. This facility permits the issuance of up to $150.0 million of letters of credit for general corporate purposes in support of any wholly-owned subsidiary. Letters of credit totaling $99.4 million and $124.4 million were outstanding under this facility at March 31, 2014 and December 31, 2013, respectively.
Financial Services
Pulte Mortgage maintains a master repurchase agreement (the “Repurchase Agreement”) with third party lenders that expires in September 2014. Effective January 2014, Pulte Mortgage voluntarily reduced the borrowing capacity under the Repurchase Agreement from $150.0 million to $99.8 million subject to certain sublimits. We reduced the borrowing capacity in order to lower associated fees during seasonally low volume periods when the additional capacity is unnecessary. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $35.8 million and $105.7 million outstanding under the Repurchase Agreement at March 31, 2014 and December 31, 2013, respectively, and was in compliance with all of its covenants and requirements.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. Commitments and contingencies
Loan origination liabilities
Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties made by us that the loans met certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If a loan is determined to be faulty, we either repurchase the loans from the investors or reimburse the investors' losses (a “make-whole” payment).
In recent years, we experienced a significant increase in losses related to repurchase requests 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. 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. Because we generally do not retain the servicing rights to the loans we originate, information regarding the current and historical performance, credit quality, and outstanding balances of such loans is limited. Estimating these loan origination liabilities is further complicated by uncertainties surrounding numerous external factors, such as various macroeconomic factors (including unemployment rates and changes in home prices), actions taken by third parties, including the parties servicing the loans, and the U.S. federal government in its dual capacity as regulator of the U.S. mortgage industry and conservator of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac, which own or guarantee the majority of mortgage loans in the U.S.
Most requests received to date relate to make-whole payments on loans that have been foreclosed. Requests undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine our liability. We establish liabilities for such anticipated losses based upon, among other things, 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. Determining these estimates and the resulting liability requires a significant level of management judgment. We are generally able to cure or refute over 60% of the requests received from investors such that we do not believe repurchases or make-whole payments will ultimately be required. For those requests that we believe will result in repurchases or make-whole payments, actual loss severities are expected to approximate 50% of the outstanding principal balance.
Activity in the first quarter of 2014 reflected a reduction of $18.6 million in liabilities based on our evaluation of required reserves in light of recent settlements of various pending repurchase requests and current conditions. Given the ongoing volatility in the mortgage industry, changes in values of underlying collateral over time, and other uncertainties regarding the ultimate resolution of these claims, actual costs could differ from our current estimates. Changes in these liabilities were as follows ($000's omitted):
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Liabilities, beginning of period | $ | 124,956 |
| | $ | 164,280 |
|
Reserves provided and adjustments | (18,604 | ) | | — |
|
Payments | (3,380 | ) | | (1,812 | ) |
Liabilities, end of period | $ | 102,972 |
| | $ | 162,468 |
|
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 representations and warranties in the origination of a certain pool of loans. Other than with respect to this pool of loans, our contractual repurchase obligations are limited to our mortgage subsidiaries, which are included in non-guarantor subsidiaries (see Note 10 for a discussion of non-guarantor subsidiaries).
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The mortgage subsidiary of Centex also sold loans to a bank for inclusion in residential mortgage-backed securities (“RMBSs”) issued by the bank. In connection with these sales, Centex's mortgage subsidiary entered into agreements pursuant to which it may be required to indemnify the bank for losses incurred by investors in the RMBSs arising out of material errors or omissions in certain information provided by the mortgage subsidiary relating to the loans and loan origination process. In 2011, the bank notified us that it has been named defendant in two lawsuits alleging various violations of federal and state securities laws asserting that untrue statements of material fact were included in the registration statements used to market the sale of two RMBS transactions which included $162 million of loans originated by Centex's mortgage subsidiary. The plaintiffs seek unspecified compensatory and/or rescissory damages on behalf of persons who purchased the securities. Neither Centex's mortgage subsidiary nor the Company is named as a defendant in these actions. We cannot yet quantify Centex's mortgage subsidiary's potential liability as a result of these indemnification obligations. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or cash flows of the Company. We are aware of six other RMBS transactions with similar indemnity provisions that include an aggregate $116 million of loans originated by Centex's mortgage subsidiary, and we are not aware of any current or threatened legal proceedings regarding those transactions.
Letters of credit and surety bonds
In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $161.8 million and $960.7 million, respectively, at March 31, 2014, and $183.1 million and $958.3 million, respectively, at December 31, 2013, respectively. In the event any such letter of credit or surety bonds are called, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be called. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.
Litigation and regulatory matters
We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations.
We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Allowance for warranties
Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to 10 years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to warranty liabilities were as follows ($000’s omitted):
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Warranty liabilities, beginning of period | $ | 63,992 |
| | $ | 64,098 |
|
Reserves provided | 8,780 |
| | 10,070 |
|
Payments | (11,075 | ) | | (11,035 | ) |
Other adjustments | (65 | ) | | 19 |
|
Warranty liabilities, end of period | $ | 61,632 |
| | $ | 63,152 |
|
Self-insured risks
We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.
Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to maintain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or to participate in a project-specific insurance program provided by the Company. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by the Company. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid on insured claims satisfy our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims. These estimates comprise a significant portion of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable.
Our recorded reserves for all such claims totaled $664.4 million at March 31, 2014, the vast majority of which relates to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 78% of the total general liability reserves at March 31, 2014. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.
Adjustments to reserves are recorded in the period in which the change in estimate occurs. Because the majority of our reserves relate to IBNR, adjustments to reserve amounts for individual existing claims generally do not impact the recorded reserves materially. However, changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Because of the inherent uncertainty in estimating future losses related to these claims, actual costs could differ significantly from estimated costs. Costs associated with our insurance programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted):
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2014 | | 2013 |
Balance, beginning of period | $ | 668,100 |
| | $ | 721,284 |
|
Reserves provided | 14,855 |
| | 14,470 |
|
Payments | (18,544 | ) | | (18,730 | ) |
Balance, end of period | $ | 664,411 |
| | $ | 717,024 |
|
10. Supplemental Guarantor information
All of our senior notes are guaranteed jointly and severally on a senior basis by each of the Company's wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2014
($000’s omitted)
|
| | | | | | | | | | | | | | | | | | | |
| Unconsolidated | | Eliminating Entries | | Consolidated PulteGroup, Inc. |
| PulteGroup, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | |
ASSETS | | | | | | | | | |
Cash and equivalents | $ | 261,885 |
| | $ | 950,771 |
| | $ | 55,506 |
| | $ | — |
| | $ | 1,268,162 |
|
Restricted cash | 60,690 |
| | 2,729 |
| | 12,177 |
| | — |
| | 75,596 |
|
House and land inventory | — |
| | 4,033,584 |
| | 710 |
| | — |
| | 4,034,294 |
|
Land held for sale | — |
| | 71,497 |
| | 1,034 |
| | — |
| | 72,531 |
|
Land, not owned, under option agreements | — |
| | 22,200 |
| | — |
| | — |
| | 22,200 |
|
Residential mortgage loans available- for-sale | — |
| | — |
| | 209,921 |
| | — |
| | 209,921 |
|
Investments in unconsolidated entities | 70 |
| | 36,019 |
| | 4,031 |
| | — |
| | 40,120 |
|
Other assets | 34,034 |
| | 374,644 |
| | 52,368 |
| | — |
| | 461,046 |
|
Intangible assets | — |
| | 132,873 |
| | — |
| | — |
| | 132,873 |
|
Deferred tax assets, net | 2,022,051 |
| | 17 |
| | 12,600 |
| | — |
| | 2,034,668 |
|
Investments in subsidiaries and intercompany accounts, net | 4,385,910 |
| | 197,260 |
| | 6,080,952 |
| | (10,664,122 | ) | | — |
|
| $ | 6,764,640 |
| | $ | 5,821,594 |
| | $ | 6,429,299 |
| | $ | (10,664,122 | ) | | $ | 8,351,411 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | |
Liabilities: | | | | | | | | | |
Accounts payable, customer deposits, accrued and other liabilities | $ | 80,725 |
| | $ | 1,344,683 |
| | $ | 206,253 |
| | $ | — |
| | $ | 1,631,661 |
|
Income tax liabilities | 205,811 |
| | (1 | ) | | — |
| | — |
| | 205,810 |
|
Financial Services debt | — |
| | — |
| | 35,836 |
| | — |
| | 35,836 |
|
Senior notes | 1,814,041 |
| | — |
| | — |
| | — |
| | 1,814,041 |
|
Total liabilities | 2,100,577 |
| | 1,344,682 |
| | 242,089 |
| | — |
| | 3,687,348 |
|
Total shareholders’ equity | 4,664,063 |
| | 4,476,912 |
| | 6,187,210 |
| | (10,664,122 | ) | | 4,664,063 |
|
| $ | 6,764,640 |
| | $ | 5,821,594 |
| | $ | 6,429,299 |
| | $ | (10,664,122 | ) | | $ | 8,351,411 |
|
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2013
($000’s omitted)
|
| | | | | | | | | | | | | | | | | | | |
| Unconsolidated | | Eliminating Entries | | Consolidated PulteGroup, Inc. |
| PulteGroup, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | |
ASSETS | | | | | | | | | |
Cash and equivalents | $ | 262,364 |
| | $ | 1,188,999 |
| | $ | 128,966 |
| | $ | — |
| | $ | 1,580,329 |
|
Restricted cash | 58,699 |
| | 2,635 |
| | 11,381 |
| | — |
| | 72,715 |
|
House and land inventory | — |
| | 3,977,851 |
| | 710 |
| | — |
| | 3,978,561 |
|
Land held for sale | — |
| | 60,701 |
| | 1,034 |
| | — |
| | 61,735 |
|
Land, not owned, under option agreements | — |
| | 24,024 |
| | — |
| | — |
| | 24,024 |
|
Residential mortgage loans available- for-sale | — |
| | — |
| | 287,933 |
| | — |
| | 287,933 |
|
Investments in unconsolidated entities | 68 |
| | 41,319 |
| | 3,936 |
| | — |
| | 45,323 |
|
Other assets | 50,251 |
| | 359,228 |
| | 51,142 |
| | — |
| | 460,621 |
|
Intangible assets | — |
| | 136,148 |
| | — |
| | — |
| | 136,148 |
|
Deferred tax assets, net | 2,074,137 |
| | 17 |
| | 12,600 |
| | — |
| | 2,086,754 |
|
Investments in subsidiaries and intercompany accounts, net | 4,532,950 |
| | (16,513 | ) | | 5,939,784 |
| | (10,456,221 | ) | | — |
|
| $ | 6,978,469 |
| | $ | 5,774,409 |
| | $ | 6,437,486 |
| | $ | (10,456,221 | ) | | $ | 8,734,143 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | |
Liabilities: | | | | | | | | | |
Accounts payable, customer deposits, accrued and other liabilities | $ | 65,334 |
| | $ | 1,413,752 |
| | $ | 236,258 |
| | $ | — |
| | $ | 1,715,344 |
|
Income tax liabilities | 206,015 |
| | — |
| | — |
| | — |
| | 206,015 |
|
Financial Services debt | — |
| | — |
| | 105,664 |
| | — |
| | 105,664 |
|
Senior notes | 2,058,168 |
| | — |
| | — |
| | — |
| | 2,058,168 |
|
Total liabilities | 2,329,517 |
| | 1,413,752 |
| | 341,922 |
| | — |
| | 4,085,191 |
|
Total shareholders’ equity | 4,648,952 |
| | 4,360,657 |
| | 6,095,564 |
| | (10,456,221 | ) | | 4,648,952 |
|
| $ | 6,978,469 |
| | $ | 5,774,409 |
| | $ | 6,437,486 |
| | $ | (10,456,221 | ) | | $ | 8,734,143 |
|
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2014
($000’s omitted)
|
| | | | | | | | | | | | | | | | | | | |
| Unconsolidated | | | | Consolidated PulteGroup, Inc. |
| PulteGroup, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminating Entries | |
Revenues: | | | | | | | | | |
Homebuilding | | | | | | | | | |
Home sale revenues | $ | — |
| | $ | 1,088,015 |
| | $ | — |
| | $ | — |
| | $ | 1,088,015 |
|
Land sale revenues | — |
| | 5,984 |
| | — |
| | — |
| | 5,984 |
|
| — |
| | 1,093,999 |
| | — |
| | — |
| | 1,093,999 |
|
Financial Services | — |
| | 379 |
| | 24,516 |
| | — |
| | 24,895 |
|
| — |
| | 1,094,378 |
| | 24,516 |
| | — |
| | 1,118,894 |
|
Homebuilding Cost of Revenues: | | | | | | | | | |
Home sale cost of revenues | — |
| | 828,603 |
| | — |
| | — |
| | 828,603 |
|
Land sale cost of revenues | — |
| | 5,011 |
| | — |
| | — |
| | 5,011 |
|
| — |
| | 833,614 |
| | — |
| | — |
| | 833,614 |
|
Financial Services expenses | 201 |
| | 77 |
| | 3,044 |
| | — |
| | 3,322 |
|
Selling, general and administrative expenses | — |
| | 144,724 |
| | 163 |
| | — |
| | 144,887 |
|
Other expense, net | 8,568 |
| | 4,981 |
| | 282 |
| | — |
| | 13,831 |
|
Interest income | (121 | ) | | (971 | ) | | (19 | ) | | — |
| | (1,111 | ) |
Interest expense | 213 |
| | — |
| | — |
| | — |
| | 213 |
|
Equity in (earnings) loss of unconsolidated entities | (2 | ) | | (5,802 | ) | | (87 | ) | | — |
| | (5,891 | ) |
Intercompany interest | 253 |
| | 1,944 |
| | (2,197 | ) | | — |
| | — |
|
Income (loss) before income taxes and equity in income (loss) of subsidiaries | (9,112 | ) | | 115,811 |
| | 23,330 |
| | — |
| | 130,029 |
|
Income tax expense (benefit) | (82 | ) | | 52,727 |
| | 2,565 |
| | — |
| | 55,210 |
|
Income (loss) before equity in income (loss) of subsidiaries | (9,030 | ) | | 63,084 |
| | 20,765 |
| | — |
| | 74,819 |
|
Equity in income (loss) of subsidiaries | 83,849 |
| | 20,887 |
| | 60,216 |
| | (164,952 | ) | | — |
|
Net income (loss) | 74,819 |
| | 83,971 |
| | 80,981 |
| | (164,952 | ) | | 74,819 |
|
Other comprehensive income | 40 |
| | — |
| | — |
| | — |
| | 40 |
|
Comprehensive income | $ | 74,859 |
| | $ | 83,971 |
| | $ | 80,981 |
| | $ | (164,952 | ) | | $ | 74,859 |
|
PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2013
($000’s omitted)
|
| | | | | | | | | | | | | | | | | | | |
| Unconsolidated | | | | Consolidated PulteGroup, Inc. |
| PulteGroup, Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminating Entries | |
Revenues: | | | | | | | | | |
Homebuilding | | | | | | | | | |
Home sale revenues | $ | — |
| | $ | 1,099,752 |
| | $ | — |
| | $ | — |
| | $ | 1,099,752 |
|
Land sale revenues | — |
| | 26,131 |
| | — |
| | — |
| | 26,131 |
|
| — |
| | 1,125,883 |
| | — |
| | — |
| | 1,125,883 |
|
Financial Services | — |
| | 619 |
| | 36,254 |
| | — |
| | 36,873 |
|
| — |
| | 1,126,502 |
| | 36,254 |
| | — |
| | 1,162,756 |
|
Homebuilding Cost of Revenues: | | | | | | | | | |
Home sale cost of revenues | — |
| | 901,470 |
| | — |
| | — |
| | 901,470 |
|
Land sale cost of revenues | — |
| | 22,018 |
| | — |
| | — |
| | 22,018 |
|
| — |
| | 923,488 |
| | — |
| | — |
| | 923,488 |
|
Financial Services expenses | 208 |
| | 143 |
| | 22,237 |
| | — |
| | 22,588 |
|
Selling, general and administrative expenses | — |
| | 128,892 |
| | 734 |
| | — |
| | 129,626 |
|
Other expense (income), net | (15 | ) | | 4,403 |
| | 384 |
| | — |
| | 4,772 |
|
Interest income | (76 | ) | | (1,055 | ) | | (42 | ) | | — |
| | (1,173 | ) |
Interest expense | 207 |
| | — |
| | — |
| | — |
| | 207 |
|
Equity in (earnings) loss of unconsolidated entities | 174,865 |
| | (172,399 | ) | | (2,466 | ) | | — |
| | — |
|
Intercompany interest | 1,459 |
| | (26 | ) | | (535 | ) | | — |
| | 898 |
|
Income (loss) before income taxes and equity in income (loss) of subsidiaries | |