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Basis of Presentation | 9 Months Ended
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Sep. 30, 2020
Accounting Policies [Abstract] |
Basis of presentation | 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, 2019. 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 January 2020, we acquired the operations of Innovative Construction Group ("ICG"), an offsite construction framing company located in Jacksonville, Florida, for $104.0 million, of which $83.3 million was paid in January 2020 while additional payments of $10.4 million will be settled in 2021 and 2022, respectively. The acquired net assets were recorded at their estimated fair values, including intangible assets of $27.8 million associated with customer relationships and $1.8 million associated with the ICG tradename, which are being amortized over seven- and five-year useful lives, respectively. The acquisition also resulted in $48.7 million of goodwill. The acquisition of these assets was not material to our results of operations or financial condition. Goodwill impairment In accordance with ASC 350, management evaluates the recoverability of goodwill by comparing the carrying value of the Company’s reporting units to their fair value. Fair value is determined using accepted valuation methods, including the use of discounted cash flows supplemented by market-based assessments of fair value. As a result of the significant decline in equity market valuations that occurred during the period between our acquisition of ICG in January 2020 and March 31, 2020, we determined that an event-driven goodwill impairment test was appropriate for the ICG goodwill, which resulted in an impairment totaling $20.2 million in the first quarter of 2020. This impairment was not the result of any unique factors specific to ICG's operations but, rather, reflected the broad-based declines in the market capitalizations of publicly-traded construction companies in the short period of time between the acquisition and the March 31, 2020 valuation date. Restructuring costs We recorded severance expense of $10.3 million during the three months ended June 30, 2020 as we took actions to reduce overhead expenses in response to lower demand in March through May resulting from the COVID-19 pandemic. Other expense, net Other expense, net consists of the following ($000’s omitted):
| Three Months Ended |  | Nine Months Ended
September 30, |  | September 30,
2020 |  | 2019 |  | 2020 |  | 2019
Write-offs of deposits and pre-acquisition costs | $ | (1,692 | ) |  | $ | (2,455 | ) |  | $ | (8,335 | ) |  | $ | (7,888 | )
Amortization of intangible assets | (5,041 | ) |  | (3,600 | ) |  | (14,643 | ) |  | (10,600 | )
Loss on debt retirement | — |  |  | — |  |  | — |  |  | (4,843 | )
Interest income | 891 |  |  | 3,554 |  |  | 6,024 |  |  | 12,974 |
Interest expense | (225 | ) |  | (147 | ) |  | (4,022 | ) |  | (437 | )
Equity in earnings of unconsolidated entities | 336 |  |  | 211 |  |  | 1,238 |  |  | 377 |
Miscellaneous, net | 1,248 |  |  | (2,671 | ) |  | 7,446 |  |  | 836 |
Total other expense, net | $ | (4,483 | ) |  | $ | (5,108 | ) |  | $ | (12,292 | ) |  | $ | (9,581 | )
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 deposits related to sold but undelivered homes, which totaled $403.6 million and $294.4 million at September 30, 2020 and December 31, 2019, 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 and other 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. Revenues related to our construction services operations are generally recognized as materials are delivered and installation services are provided. 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 $36.8 million and $35.1 million at September 30, 2020 and December 31, 2019, respectively. 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 share units, 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 units and deferred shares are considered participating securities. The following table presents the earnings per common share (000's omitted, except per share data):
| Three Months Ended |  | Nine Months Ended
September 30, |  | September 30,
2020 |  | 2019 |  | 2020 |  | 2019
Numerator: |  |  |  |  |  |  |
Net income | $ | 416,398 |  |  | $ | 273,104 |  |  | $ | 968,728 |  |  | $ | 680,902 |
Less: earnings distributed to participating securities | (264 | ) |  | (298 | ) |  | (799 | ) |  | (911 | )
Less: undistributed earnings allocated to participating securities | (3,123 | ) |  | (2,411 | ) |  | (7,778 | ) |  | (6,075 | )
Numerator for basic earnings per share | $ | 413,011 |  |  | $ | 270,395 |  |  | $ | 960,151 |  |  | $ | 673,916 |
Add back: undistributed earnings allocated to participating securities | 3,123 |  |  | 2,411 |  |  | 7,778 |  |  | 6,075 |
Less: undistributed earnings reallocated to participating securities | (3,116 | ) |  | (2,405 | ) |  | (7,754 | ) |  | (6,057 | )
Numerator for diluted earnings per share | $ | 413,018 |  |  | $ | 270,401 |  |  | $ | 960,175 |  |  | $ | 673,934 |
Denominator: |  |  |  |  |  |  |
Basic shares outstanding | 268,363 |  |  | 272,992 |  |  | 268,892 |  |  | 275,734 |
Effect of dilutive securities | 598 |  |  | 640 |  |  | 839 |  |  | 858 |
Diluted shares outstanding | 268,961 |  |  | 273,632 |  |  | 269,731 |  |  | 276,592 |
Earnings per share: |  |  |  |  |  |  |
Basic | $ | 1.54 |  |  | $ | 0.99 |  |  | $ | 3.57 |  |  | $ | 2.44 |
Diluted | $ | 1.54 |  |  | $ | 0.99 |  |  | $ | 3.56 |  |  | $ | 2.44 |
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, 2020 and December 31, 2019, residential mortgage loans available-for-sale had an aggregate fair value of $400.1 million and $509.0 million, respectively, and an aggregate outstanding principal balance of $382.9 million and $494.1 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(0.7) million and $0.6 million for the three months ended September 30, 2020 and 2019, respectively, and $(2.1) million and $(0.7) million for the nine months ended September 30, 2020 and 2019, 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 $76.6 million and $36.3 million for the three months ended September 30, 2020 and 2019, respectively, and $173.8 million and $90.6 million for the nine months ended September 30, 2020 and 2019, 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, 2020 and December 31, 2019, we had aggregate IRLCs of $471.6 million and $255.3 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, 2020 and December 31, 2019, we had unexpired forward contracts of $671.0 million and $518.2 million, respectively, and whole loan investor commitments of $148.0 million and $200.7 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, 2020 |  | December 31, 2019
| Other Assets |  | Accrued and Other Liabilities |  | Other Assets |  | Accrued and Other Liabilities
Interest rate lock commitments | $ | 23,064 |  |  | $ | 2,336 |  |  | $ | 8,351 |  |  | $ | 149 |
Forward contracts | 372 |  |  | 2,260 |  |  | 299 |  |  | 1,372 |
Whole loan commitments | 295 |  |  | 481 |  |  | 880 |  |  | 284 |
| $ | 23,731 |  |  | $ | 5,077 |  |  | $ | 9,530 |  |  | $ | 1,805 |
Credit losses We are exposed to credit losses primarily through our vendors and insurance carriers. We assess and monitor each counterparty’s ability to pay amounts owed by considering contractual terms and conditions, the counterparty’s financial condition, macroeconomic factors, and business strategy. At September 30, 2020, we reported $195.2 million of assets in-scope under Accounting Standards Codification 326, "Financial Instruments - Credit Losses" ("ASC 326"). These assets consist primarily of insurance receivables, contract assets related to insurance brokerage commissions, and vendor rebate receivables. Counterparties associated with these assets are generally highly rated. Allowances on the aforementioned in-scope assets were not material as of September 30, 2020. New accounting pronouncements On January 1, 2020, we adopted ASC 326, which changed the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology. We adopted ASC 326 using the modified retrospective transition method. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. Our adoption of ASC 326 resulted in a $0.7 million decrease to retained earnings as of January 1, 2020. In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which removed the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. Under the new standard, goodwill impairment is 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. We adopted the standard for annual and interim periods beginning January 1, 2020, and the standard was followed in the previously mentioned assessment of the ICG goodwill. In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for the Company beginning January 1, 2021. We do not expect ASU 2019-12 to have a material impact on our financial statements.

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- Definition The entire disclosure for the basis of presentation and significant accounting policies concepts. Basis of presentation describes the underlying basis used to prepare the financial statements (for example, US Generally Accepted Accounting Principles, Other Comprehensive Basis of Accounting, IFRS). Accounting policies describe all significant accounting policies of the reporting entity. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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