PulteGroup - 10-Q quarterly report FY2016 Q2

______________________________________________________________________________________________________

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 June 30, 2016

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9804

PULTEGROUP, INC.

(Exact name of registrant as specified in its charter)



MICHIGAN		38-2766606
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3350 Peachtree Road NE, Suite 150

Atlanta, Georgia 30326

(Address of principal executive offices) (Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically 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 Exchange Act).

YES [ ] NO [X]

Number of shares of common stock outstanding as of July 15, 2016: 343,619,974 ______________________________________________________________________________________________________

PULTEGROUP, INC.

INDEX



		Page No.
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015	3

	Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015	4

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	5

	Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2016 and 2015	6

	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4	Controls and Procedures	45

PART II	OTHER INFORMATION	46

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 5	Other Information	46

Item 6	Exhibits	48

	Signatures	50

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PULTEGROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

($000’s omitted)



	June 30, 2016		December 31, 2015
	(Unaudited)		(Note)
ASSETS

Cash and equivalents	$	229,187	$	754,161
Restricted cash	26,484		21,274
House and land inventory	6,629,464		5,450,058
Land held for sale	85,781		81,492
Residential mortgage loans available-for-sale	364,004		442,715
Investments in unconsolidated entities	52,500		41,267
Other assets	681,168		660,835
Intangible assets	161,372		110,215
Deferred tax assets, net	1,277,096		1,394,879
	$	9,507,056	$	8,956,896

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:
Accounts payable	$	340,847	$	327,725
Customer deposits	252,259		186,141
Accrued and other liabilities	1,269,263		1,284,273
Income tax liabilities	33,980		57,050
Financial Services debt	189,557		267,877
Term loan	499,212		498,423
Senior notes	2,103,821		1,576,082
	4,688,939		4,197,571
Shareholders' equity	4,818,117		4,759,325
	$	9,507,056	$	8,956,896

Note: The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles 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				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Revenues:
Homebuilding
Home sale revenues	$	1,751,882	$	1,243,077	$	3,146,125	$	2,331,235
Land sale revenues	4,950		6,460		7,437		24,002
	1,756,832		1,249,537		3,153,562		2,355,237
Financial Services	43,082		30,754		78,930		58,352
Total revenues	1,799,914		1,280,291		3,232,492		2,413,589

Homebuilding Cost of Revenues:
Home sale cost of revenues	1,374,509		953,280		2,463,838		1,794,425
Land sale cost of revenues	4,403		5,312		6,430		18,691
	1,378,912		958,592		2,470,268		1,813,116
Financial Services expenses	26,180		20,767		52,298		43,308
Selling, general, and administrative expenses	192,333		130,119		383,348		291,431
Other expense (income), net	12,909		3,186		18,785		2,303
Income before income taxes	189,580		167,627		307,793		263,431
Income tax expense	71,820		64,303		106,733		105,136
Net income	$	117,760	$	103,324	$	201,060	$	158,295

Per share:
Basic earnings	$	0.34	$	0.28	$	0.58	$	0.43
Diluted earnings	$	0.34	$	0.28	$	0.57	$	0.43
Cash dividends declared	$	0.09	$	0.08	$	0.18	$	0.16

Number of shares used in calculation:
Basic	345,240		361,009		346,528		363,863
Effect of dilutive securities	2,759		3,232		2,710		3,297
Diluted	347,999		364,241		349,238		367,160

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(000’s omitted)

(Unaudited)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Net income	$	117,760	$	103,324	$	201,060	$	158,295

Other comprehensive income, net of tax:
Change in value of derivatives	20		21		41		42
Other comprehensive income	20		21		41		42

Comprehensive income	$	117,780	$	103,345	$	201,101	$	158,337

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			Total
	Shares		$			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
Shareholders' Equity, January 1, 2016	349,149		$	3,491		$	3,093,802		$	(609	)	$	1,662,641		$	4,759,325
Stock option exercises	67		—			742			—			—			742
Share issuances, net of cancellations	499		5			8,851			—			—			8,856
Dividends declared	—		—			—			—			(62,747		)	(62,747		)
Share repurchases	(5,819	)	(58		)	—			—			(100,748		)	(100,806		)
Share-based compensation	—		—			12,209			—			—			12,209
Excess tax benefits (deficiencies) from share-based awards	—		—			(563		)	—			—			(563		)
Net income	—		—			—			—			201,060			201,060
Other comprehensive income	—		—			—			41			—			41
Shareholders' Equity, June 30, 2016	343,896		$	3,438		$	3,115,041		$	(568	)	$	1,700,206		$	4,818,117

Shareholders' Equity, January 1, 2015	369,459		$	3,695		$	3,072,996		$	(690	)	$	1,728,953		$	4,804,954
Stock option exercises	620		6			7,216			—			—			7,222
Share issuances, net of cancellations	442		4			7,419			—			—			7,423
Dividends declared	—		—			8			—			(58,235		)	(58,227		)
Share repurchases	(15,702	)	(157		)	—			—			(321,909		)	(322,066		)
Share-based compensation	—		—			10,233			—			—			10,233
Excess tax benefits (deficiencies) from share-based awards	—		—			(1,617		)	—			—			(1,617		)
Net income	—		—			—			—			158,295			158,295
Other comprehensive income	—		—			—			42			—			42
Shareholders' Equity, June 30, 2015	354,819		$	3,548		$	3,096,255		$	(648	)	$	1,507,104		$	4,606,259

See accompanying Notes to Condensed Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

($000’s omitted)

(Unaudited)



	Six Months Ended
	June 30,
	2016			2015
Cash flows from operating activities:
Net income	$	201,060		$	158,295
Adjustments to reconcile net income to net cash from operating activities:
Deferred income tax expense	117,783			103,059
Depreciation and amortization	26,705			21,853
Share-based compensation expense	16,906			14,654
Other, net	9,790			9,319
Increase (decrease) in cash due to:
Restricted cash	(5,210		)	(4,526		)
Inventories	(810,417		)	(485,676		)
Residential mortgage loans available-for-sale	78,460			70,123
Other assets	(15,506		)	(57,054		)
Accounts payable, accrued and other liabilities	55,113			(21,150		)
Net cash provided by (used in) operating activities	(325,316		)	(191,103		)
Cash flows from investing activities:
Capital expenditures	(21,044		)	(23,115		)
Cash used for business acquisition	(430,025		)	—
Other investing activities, net	(8,296		)	14,650
Net cash used in investing activities	(459,365		)	(8,465		)
Cash flows from financing activities:
Proceeds from debt issuance	986,084			—
Repayments of debt	(484,974		)	(237,994		)
Borrowings under revolving credit facility	358,000			—
Repayments under revolving credit facility	(358,000		)	—
Financial Services borrowings (repayments)	(78,320		)	(20,970		)
Stock option exercises	742			7,222
Share repurchases	(100,806		)	(322,066		)
Dividends paid	(63,019		)	(59,125		)
Net cash provided by (used in) financing activities	259,707			(632,933		)
Net increase (decrease) in cash and equivalents	(524,974		)	(832,501		)
Cash and equivalents at beginning of period	754,161			1,292,862
Cash and equivalents at end of period	$	229,187		$	460,361

Supplemental Cash Flow Information:
Interest paid (capitalized), net	$	(14,671	)	$	(1,911	)
Income taxes paid (refunded), net	$	(5,457	)	$	(1,685	)

See accompanying Notes to Condensed Consolidated Financial Statements.

1. Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States ("U.S."), and our common shares trade on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also 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 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, 2015.

Business acquisition

We acquired substantially all of the assets of JW Homes ("Wieland") in January 2016, for $430.0 million in cash and the assumption of certain payables related to such assets. The acquired net assets were located in Atlanta, Charleston, Charlotte, Nashville, and Raleigh, and included approximately 7,000 lots, including 375 homes in inventory, and control of approximately 1,300 lots through land option contracts. We also assumed a sales order backlog of 317 homes. The acquired net assets were recorded at their estimated fair values and resulted in goodwill of $40.1 million and separately identifiable intangible assets of $18.0 million comprised of the John Wieland Homes and Neighborhoods tradename, which is being amortized over a 20-year life. The acquisition of these assets was not material to our results of operations or financial condition.

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.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation, including the adoption in January 2016 of Accounting Standards Update ("ASU") 2015-03, “Interest - Imputation of Interest,” which changes the presentation of debt issuance costs in the balance sheet from an asset to a direct reduction of the carrying amount of the related debt. The adoption of this guidance resulted in the reclassification of applicable unamortized debt issuance costs from other assets to senior notes and term loan. See Note 4.

Subsequent events

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

Other expense (income), net

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



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Write-off of deposits and pre-acquisition costs	$	7,414		$	1,241		$	10,454		$	3,110
Lease exit and related costs	7,311			336			5,946			222
Amortization of intangible assets	3,450			3,225			6,900			6,450
Interest income	(849		)	(856		)	(1,772		)	(1,955		)
Interest expense	186			208			360			395
Equity in earnings of unconsolidated entities	(3,829		)	(1,164		)	(4,004		)	(2,271		)
Miscellaneous, net	(774		)	196			901			(3,648		)
	$	12,909		$	3,186		$	18,785		$	2,303

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders (the “Numerator”) by the weighted-average number of common shares outstanding, adjusted for unvested shares (the “Denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the Denominator is increased to include the dilutive effects of stock options, unvested restricted shares, and 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. Our diluted earnings per share calculation excluded 2.3 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units, for both the three and six months ended June 30, 2016, respectively, and 4.3 million and 4.5 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units, for the three and six months ended June 30, 2015, respectively.

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



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Numerator:
Net income	$	117,760		$	103,324		$	201,060		$	158,295
Less: earnings distributed to participating securities	(283		)	(185		)	(568		)	(373		)
Less: undistributed earnings allocated to participating securities	(791		)	(475		)	(1,064		)	(647		)
Numerator for basic earnings per share	$	116,686		$	102,664		$	199,428		$	157,275
Add back: undistributed earnings allocated to participating securities	791			475			1,064			647
Less: undistributed earnings reallocated to participating securities	(785		)	(471		)	(1,055		)	(641		)
Numerator for diluted earnings per share	$	116,692		$	102,668		$	199,437		$	157,281

Denominator:
Basic shares outstanding	345,240			361,009			346,528			363,863
Effect of dilutive securities	2,759			3,232			2,710			3,297
Diluted shares outstanding	347,999			364,241			349,238			367,160

Earnings per share:
Basic	$	0.34		$	0.28		$	0.58		$	0.43
Diluted	$	0.34		$	0.28		$	0.57		$	0.43

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 June 30, 2016 and December 31, 2015, residential mortgage loans available-for-sale had an aggregate fair value of $364.0 million and $442.7 million, respectively, and an aggregate outstanding principal balance of $348.7 million and $429.6 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $0.4 million and $(0.9) million for the three months ended June 30, 2016 and 2015, respectively, and $1.3 million and $(0.8) million for the six months ended June 30, 2016 and 2015. 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 $25.8 million and $17.6 million for the three months ended June 30, 2016 and 2015, respectively, and $47.3 million and $33.8 million for the six months ended June 30, 2016 and 2015, 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 June 30, 2016 and December 31, 2015, we had aggregate interest rate lock commitments of $320.8 million and $208.2 million, respectively, which were originated at interest rates prevailing at the date of commitment.

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 commitments, which are obligations of the 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 execute an interest rate lock until the time the loan is sold to an investor. At June 30, 2016 and December 31, 2015, we had unexpired forward contracts of $574.0 million and $525.0 million, respectively, and whole loan investor commitments of $65.6 million and $77.6 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 interest rate lock commitments 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 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):



	June 30, 2016				December 31, 2015
	Other Assets		Accrued and Other Liabilities		Other Assets		Accrued and Other Liabilities
Interest rate lock commitments	$	11,591	$	111	$	5,854	$	280
Forward contracts	401		6,735		1,178		840
Whole loan commitments	111		414		358		345
	$	12,103	$	7,260	$	7,390	$	1,465

New accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers". The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued, or is preparing to issue, a number of updates to this standard. The standard is effective for us for annual and interim periods beginning January 1, 2018 and allows for full retrospective or modified retrospective methods of adoption. We are currently evaluating the impact that the standard will have on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for annual and interim reporting periods beginning January 1, 2017 and is not expected to have a material impact on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. ASU 2016-02 will be effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact that the standard will have on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which includes multiple amendments intended to simplify aspects of share-based payment accounting. ASU 2016-09 will be effective for annual reporting periods beginning after December 15, 2016, with early adoption permitted. Amendments to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures will be applied using a modified retrospective transition method through a cumulative-effect adjustment to equity as of the beginning of the period of adoption. Amendments to the presentation of employee taxes on the statement of cash flows will be applied retrospectively, and amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. We are currently evaluating the impact that the standard will have on our financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology and also requires that credit losses from available-for-sale debt securities be presented as an allowance instead of a write-down. ASU 2016-13 is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted, and requires full retrospective application on adoption. We are currently evaluating the impact the standard will have on our financial statements.

2. Inventory

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



	June 30, 2016		December 31, 2015
Homes under construction	$	2,058,479	$	1,408,260
Land under development	3,704,857		3,259,066
Raw land	866,128		782,732
	$	6,629,464	$	5,450,058

We capitalize interest cost into inventory during the active development and construction of our communities. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Information related to interest capitalized into inventory is as follows ($000’s omitted):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Interest in inventory, beginning of period	$	158,653		$	166,887		$	149,498		$	167,638
Interest capitalized	38,231			31,296			73,515			62,099
Interest expensed	(29,396		)	(33,799		)	(55,525		)	(65,353		)
Interest in inventory, end of period	$	167,488		$	164,384		$	167,488		$	164,384

Land option agreements

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

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. No VIEs required consolidation at either June 30, 2016 or December 31, 2015 because we determined that we were not the VIE's primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements. The following provides a summary of our interests in land option agreements as of June 30, 2016 and December 31, 2015 ($000’s omitted):



	June 30, 2016				December 31, 2015
	Deposits and Pre-acquisition Costs		Remaining Purchase Price		Deposits and Pre-acquisition Costs		Remaining Purchase Price
Land options with VIEs	$	80,063	$	928,327	$	77,641	$	1,064,506
Other land options	98,744		1,165,813		84,478		981,687
	$	178,807	$	2,094,140	$	162,119	$	2,046,193

3. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:



Northeast:		Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Virginia
Southeast:		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida
Midwest:		Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Ohio
Texas:		Texas
West:		Arizona, California, Nevada, New Mexico, Washington

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



	Operating Data by Segment ($000’s omitted)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Revenues:
Northeast	$	152,517		$	137,181		$	271,171		$	248,334
Southeast (a)	387,675			245,250			682,101			431,038
Florida	283,440			208,740			553,281			411,802
Midwest	286,649			227,489			476,541			406,141
Texas	255,471			185,489			468,763			362,988
West	391,080			245,388			701,705			494,934
	1,756,832			1,249,537			3,153,562			2,355,237
Financial Services	43,082			30,754			78,930			58,352
Consolidated revenues	$	1,799,914		$	1,280,291		$	3,232,492		$	2,413,589

Income before income taxes:
Northeast	$	19,238		$	15,330		$	28,828		$	24,857
Southeast (a)	40,758			39,871			60,528			64,495
Florida	44,353			39,315			84,655			72,539
Midwest	26,253			14,630			31,873			15,810
Texas	36,223			24,488			64,740			47,278
West	41,829			32,441			75,336			63,521
Other homebuilding (b)	(36,108		)	(8,435		)	(64,981		)	(40,113		)
	172,546			157,640			280,979			248,387
Financial Services	17,034			9,987			26,814			15,044
Consolidated income before income taxes	$	189,580		$	167,627		$	307,793		$	263,431


(a)	Southeast includes the acquisition in January 2016 of substantially all of the assets of Wieland (see Note 1).


(b)	Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. For the three and six months ended June 30, 2015, Other homebuilding also includes a reserve reversal of $26.9 million resulting from a favorable legal settlement.



	Operating Data by Segment
	($000's omitted)
	June 30, 2016
	Homes Under Construction		Land Under Development		Raw Land		Total Inventory		Total Assets
Northeast	$	215,519	$	307,440	$	122,107	$	645,066	$	783,163
Southeast (a)	376,012		554,662		230,502		1,161,176		1,263,995
Florida	288,038		641,869		164,140		1,094,047		1,238,973
Midwest	303,569		435,719		62,252		801,540		859,922
Texas	234,589		367,399		85,593		687,581		782,448
West	614,600		1,186,901		175,141		1,976,642		2,185,570
Other homebuilding (b)	26,152		210,867		26,393		263,412		1,957,860
	2,058,479		3,704,857		866,128		6,629,464		9,071,931
Financial Services	—		—		—		—		435,125
	$	2,058,479	$	3,704,857	$	866,128	$	6,629,464	$	9,507,056

	December 31, 2015
	Homes Under Construction		Land Under Development		Raw Land		Total Inventory		Total Assets
Northeast	$	163,173	$	292,631	$	121,522	$	577,326	$	688,610
Southeast	196,456		367,577		139,246		703,279		765,933
Florida	227,910		574,092		97,185		899,187		1,013,543
Midwest	197,738		414,386		68,918		681,042		734,834
Texas	191,424		317,702		107,737		616,863		691,342
West	413,208		1,094,112		222,920		1,730,240		1,924,958
Other homebuilding (b)	18,351		198,566		25,204		242,121		2,628,687
	1,408,260		3,259,066		782,732		5,450,058		8,447,907
Financial Services	—		—		—		—		508,989
	$	1,408,260	$	3,259,066	$	782,732	$	5,450,058	$	8,956,896


(a)	Southeast includes the acquisition in January 2016 of substantially all of the assets of Wieland (see Note 1).


(b)	Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments.

4. Debt

Senior notes

Our senior notes are summarized as follows ($000’s omitted):



	June 30, 2016			December 31, 2015
6.500% unsecured senior notes due May 2016 (a)	—			465,245
7.625% unsecured senior notes due October 2017 (b)	123,000			123,000
4.250% unsecured senior notes due March 2021 (a)	300,000			—
5.500% unsecured senior notes due March 2026 (a)	700,000			—
7.875% unsecured senior notes due June 2032 (a)	300,000			300,000
6.375% unsecured senior notes due May 2033 (a)	400,000			400,000
6.000% unsecured senior notes due February 2035 (a)	300,000			300,000
Net premiums, discounts, and issuance costs (c)	(19,179		)	(12,163		)
Total senior notes	$	2,103,821		$	1,576,082
Estimated fair value	$	2,204,630		$	1,643,651


(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 carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes. As discussed in Note 1, we adopted ASU 2015-03 in January 2016. We applied the new guidance retrospectively to all prior periods presented in the financial statements to conform to the 2016 presentation. As a result, $10.3 million of debt issuance costs at December 31, 2015, were reclassified from other assets to a reduction in senior notes.

In February 2016 we issued $1.0 billion of senior unsecured notes, consisting of $300 million of 4.25% senior notes due March 1, 2021, and $700 million of 5.50% senior notes due March 1, 2026. The net proceeds from the senior notes issuance were used to fund the retirement of $465.2 million of our senior notes that matured in May 2016, with the remaining net proceeds used for general corporate purposes. The notes are senior unsecured obligations and rank equally in right of payment with the existing and future senior unsecured indebtedness of the Company and each of the guarantors, respectively. The notes are redeemable at our option at any time up to the date of maturity.

Revolving credit facility

In June 2016, we entered into an amended and restated senior unsecured revolving credit facility (the “Revolving Credit Facility”) that provides for an increase in our maximum borrowings from $500.0 million to $750.0 million and extends the maturity date from July 2017 to June 2019. The Revolving Credit Facility contains an uncommitted accordion feature that could increase the size of the Revolving Credit Facility to $1.25 billion, subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility with a sublimit of $375.0 million at June 30, 2016. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined. We had no borrowings outstanding and $227.2 million and $191.3 million of letters of credit issued under the Revolving Credit Facility at June 30, 2016 and December 31, 2015, respectively.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of June 30, 2016, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries.

Term loan

On September 30, 2015, we entered into a senior unsecured $500.0 million term loan agreement (the “Term Loan”) with an initial maturity date of January 3, 2017, which can be extended at our option up to 12 months. The interest rate on the Term Loan may be based on either LIBOR or a base rate plus an applicable margin, as defined. Borrowings are interest only with the principal being due at the maturity date and are guaranteed by the same wholly-owned subsidiaries as under the Revolving Credit Agreement. The Term Loan contains customary affirmative and negative covenants for loans of this type, including the same financial covenants as under the Revolving Credit Facility. As of June 30, 2016, we were in compliance with all covenants.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties that totaled $17.2 million at June 30, 2016 and $35.3 million at December 31, 2015. These notes have maturities ranging up to four years, are collateralized by the land positions to which they relate, have no recourse to any other assets, and are classified within accrued and other liabilities. The stated interest rates on these notes range up to 5.00%.

Pulte Mortgage

Pulte Mortgage maintains a master repurchase agreement (the “Repurchase Agreement”) with third party lenders that expires in September 2016. The Repurchase Agreement's borrowing capacity was $310.0 million through January 18, 2016, after which it decreased to $175.0 million through June 26, 2016, at which time it increased to $200.0 million, which is effective through the maturity date. The purpose of the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. 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 $189.6 million and $267.9 million outstanding under the Repurchase Agreement at June 30, 2016 and December 31, 2015, respectively, and was in compliance with all of its covenants and requirements as of such dates.

5. Shareholders’ equity

During the six months ended June 30, 2016, we declared cash dividends totaling $62.7 million and repurchased 5.6 million shares under our repurchase authorization for a total of $97.7 million. During the six months ended June 30, 2015, we declared cash dividends totaling $58.2 million and repurchased 15.3 million shares under our repurchase authorization for a total of $313.0 million. At June 30, 2016, we had remaining authorization to repurchase $507.1 million of common shares. On July 20, 2016, our Board of Directors approved a $1.0 billion increase in our share repurchase authorization, raising our total authorization to $1.5 billion. We plan to repurchase $250.0 million of shares in each of the third and fourth quarters of 2016 and $1.0 billion of shares in 2017.

Under our share-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of shares, generally related to the payment of minimum tax obligations. During the six months ended June 30, 2016 and 2015, employees surrendered shares valued at $3.1 million and $9.0 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

6. Income taxes

Our effective tax rate for the three and six months ended June 30, 2016 was 37.9% and 34.7%, respectively, compared to 38.4% and 39.9%, respectively, for the same periods in 2015. Our effective tax rate for the current year differed from the federal statutory tax rate primarily due to state income taxes on current year earnings and the favorable resolution of certain state income tax matters. For the prior year, our effective tax rate differed from the federal statutory tax rate primarily due to state income taxes and adjustments to deferred taxes due to changes in state laws and business operations.

At June 30, 2016 and December 31, 2015, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $1.3 billion and $1.4 billion, respectively. The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. At June 30, 2016 and December 31, 2015, we had $22.5 million and $39.0 million, respectively, of gross unrecognized tax benefits and $11.9 million and $17.2 million, respectively, 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 $18.5 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 examinations within the next twelve months. The final outcome of these examinations is not yet determinable. The statutes of limitation for our major tax jurisdictions generally remain open for examination for tax years 2005 to 2016.

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
Financial Instrument	Fair Value Hierarchy	June 30, 2016			December 31, 2015

Measured at fair value on a recurring basis:
Residential mortgage loans available-for-sale	Level 2	$	364,004		$	442,715
Interest rate lock commitments	Level 2	11,480			5,574
Forward contracts	Level 2	(6,334		)	338
Whole loan commitments	Level 2	(303		)	13

Measured at fair value on a non-recurring basis:
House and land inventory	Level 3	$	—		$	11,052

Disclosed at fair value:
Cash and equivalents (including restricted cash)	Level 1	$	255,671		$	775,435
Financial Services debt	Level 2	189,557			267,877
Term loan	Level 2	500,000			500,000
Senior notes	Level 2	2,204,630			1,643,651

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 commitments are based on market prices for similar instruments from the specific whole loan investor.

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair values included in the above table represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates.

The carrying amounts of cash and equivalents, Financial Services debt, the Term Loan, and the Revolving Credit Facility approximate their fair values due to their short-term nature and floating interest rate terms. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $2.1 billion and $1.6 billion at June 30, 2016 and December 31, 2015, respectively.

8. Commitments and contingencies

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties made by us that the loans met certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. Determining the liabilities for anticipated losses requires a significant level of management judgment. Given the nature of these claims and the uncertainty regarding their ultimate resolution, actual costs could differ from our current estimates. Changes in these liabilities were as follows ($000's omitted):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Liabilities, beginning of period	$	47,093		$	58,226		$	46,381		$	58,222
Reserves provided (released), net	(99		)	81			767			139
Payments	(11,049		)	(69		)	(11,203		)	(123		)
Liabilities, end of period	$	35,945		$	58,238		$	35,945		$	58,238

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 $227.2 million and $1.1 billion, respectively, at June 30, 2016 and $191.3 million and $1.0 billion, respectively, at December 31, 2015. In the event any such letter of credit or surety bond is drawn, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be drawn. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

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.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to and in limited instances exceeding 10 years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to warranty liabilities were as follows ($000’s omitted):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Warranty liabilities, beginning of period	$	60,936		$	57,401		$	61,360		$	65,389
Reserves provided	14,204			11,170			26,523			20,011
Payments	(13,101		)	(14,648		)	(25,844		)	(31,477		)
Other adjustments	(200		)	579			(200		)	579
Warranty liabilities, end of period	$	61,839		$	54,502		$	61,839		$	54,502

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 participate in a project-specific insurance program provided by us. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by us. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage generally requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid to satisfy insured claims apply to our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omissions, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims.

Our recorded reserves for all such claims totaled $707.3 million and $692.1 million at June 30, 2016 and December 31, 2015, respectively, 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 64% and 65% of the total general liability reserves at June 30, 2016 and December 31, 2015, respectively. 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.

Housing market conditions have been volatile across most of our markets over the past ten years, and we believe such conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs. Adjustments to reserves are recorded in the period in which the change in estimate occurs.

During the three months ended June 30, 2015, we recorded a general liability reserve reversal of $26.9 million resulting from a legal settlement relating to plumbing claims initially reported to us in 2008 and for which our recorded liabilities were adjusted over time based on changes in facts and circumstances. These claims ultimately resulted in a class action lawsuit involving a national vendor and numerous other homebuilders, homebuyers, and insurance companies. In 2015, a global settlement was reached, pursuant to which we funded our agreed upon share of settlement costs, which were significantly lower than our previously estimated exposure.

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						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Balance, beginning of period	$	692,980		$	720,767		$	692,053		$	710,245
Reserves provided, net	25,317			(9,386		)	45,068			6,446
Payments	(10,991		)	(11,248		)	(29,815		)	(16,558		)
Balance, end of period	$	707,306		$	700,133		$	707,306		$	700,133

In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. Such receivables are recorded in other assets and totaled $136.7 million and $130.2 million at June 30, 2016 and December 31, 2015, respectively. The insurance receivables relate to costs incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of construction defect claims that we believe are insured. Given the complexity inherent with resolving construction defect claims in the homebuilding industry as described above, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers. In addition, disputes between homebuilders and carriers over coverage positions relating to construction defect claims are common. Resolution of claims with carriers involves the exchange of significant amounts of information and frequently involves legal action. Currently, we are the plaintiff in litigation with certain of our insurance carriers in regard to $108.1 million of recorded insurance receivables relating to the applicability of coverage to such costs under their policies.

We believe collection of these insurance receivables, including those in litigation, is probable based on the legal merits of our positions after review by legal counsel, favorable legal rulings received to date, the high credit ratings of our carriers, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims, including significant amounts funded by the above carriers under different policies. While the outcome of these matters 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.

9. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by certain of our wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Our subsidiaries comprising the Financial Services segment along with certain other subsidiaries (collectively, the "Non-Guarantor Subsidiaries") do not guarantee the senior notes. In accordance with Rule 3-10 of Regulation S-X, supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting.

CONDENSED CONSOLIDATING BALANCE SHEET

JUNE 30, 2016

($000’s omitted)



	Unconsolidated							Eliminating Entries			Consolidated PulteGroup, Inc.
	PulteGroup, Inc.		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated PulteGroup, Inc.
ASSETS
Cash and equivalents	$	—	$	166,389		$	62,798	$	—		$	229,187
Restricted cash	—		25,001			1,483		—			26,484
House and land inventory	—		6,583,222			46,242		—			6,629,464
Land held for sale	—		85,271			510		—			85,781
Residential mortgage loans available- for-sale	—		—			364,004		—			364,004
Investments in unconsolidated entities	99		47,569			4,832		—			52,500
Other assets	22,145		533,458			125,565		—			681,168
Intangible assets	—		161,372			—		—			161,372
Deferred tax assets, net	1,274,468		—			2,628		—			1,277,096
Investments in subsidiaries and intercompany accounts, net	6,237,109		(264,227		)	6,614,233		(12,587,115		)	—
	$	7,533,821	$	7,338,055		$	7,222,295	$	(12,587,115	)	$	9,507,056
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	78,691	$	1,609,312		$	174,366	$	—		$	1,862,369
Income tax liabilities	33,980		—			—		—			33,980
Financial Services debt	—		—			189,557		—			189,557
Term loan	499,212		—			—		—			499,212
Senior notes	2,103,821		—			—		—			2,103,821
Total liabilities	2,715,704		1,609,312			363,923		—			4,688,939
Total shareholders’ equity	4,818,117		5,728,743			6,858,372		(12,587,115		)	4,818,117
	$	7,533,821	$	7,338,055		$	7,222,295	$	(12,587,115	)	$	9,507,056

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2015

($000’s omitted)



	Unconsolidated						Eliminating Entries			Consolidated PulteGroup, Inc.
	PulteGroup, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Consolidated PulteGroup, Inc.
ASSETS
Cash and equivalents	$	—	$	638,602	$	115,559	$	—		$	754,161
Restricted cash	—		20,274		1,000		—			21,274
House and land inventory	—		5,450,058		—		—			5,450,058
Land held for sale	—		80,458		1,034		—			81,492
Residential mortgage loans available- for-sale	—		—		442,715		—			442,715
Investments in unconsolidated entities	93		36,499		4,675		—			41,267
Other assets	38,991		531,120		90,724		—			660,835
Intangible assets	—		110,215		—		—			110,215
Deferred tax assets, net	1,392,251		11		2,617		—			1,394,879
Investments in subsidiaries and intercompany accounts, net	5,529,606		465,644		6,293,018		(12,288,268		)	—
	$	6,960,941	$	7,332,881	$	6,951,342	$	(12,288,268	)	$	8,956,896
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	70,061	$	1,558,885	$	169,193	$	—		$	1,798,139
Income tax liabilities	57,050		—		—		—			57,050
Financial Services debt	—		—		267,877		—			267,877
Term loan	498,423		—		—		—			498,423
Senior notes	1,576,082		—		—		—			1,576,082
Total liabilities	2,201,616		1,558,885		437,070		—			4,197,571
Total shareholders’ equity	4,759,325		5,773,996		6,514,272		(12,288,268		)	4,759,325
	$	6,960,941	$	7,332,881	$	6,951,342	$	(12,288,268	)	$	8,956,896

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

For the three months ended June 30, 2016

($000’s omitted)



	Unconsolidated											Consolidated PulteGroup, Inc.
	PulteGroup, Inc.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated PulteGroup, Inc.
Revenues:
Homebuilding
Home sale revenues	$	—		$	1,746,484	$	5,398		$	—		$	1,751,882
Land sale revenues	—			3,893		1,057			—			4,950
	—			1,750,377		6,455			—			1,756,832
Financial Services	—			—		43,082			—			43,082
	—			1,750,377		49,537			—			1,799,914
Homebuilding Cost of Revenues:
Home sale cost of revenues	—			1,369,003		5,506			—			1,374,509
Land sale cost of revenues	—			3,505		898			—			4,403
	—			1,372,508		6,404			—			1,378,912
Financial Services expenses	—			137		26,043			—			26,180
Selling, general, and administrative expenses	—			184,515		7,818			—			192,333
Other expense (income), net	170			20,759		(8,020		)	—			12,909
Intercompany interest	490			2,035		(2,525		)	—			—
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(660		)	170,423		19,817			—			189,580
Income tax expense (benefit)	(246		)	64,415		7,651			—			71,820
Income (loss) before equity in income (loss) of subsidiaries	(414		)	106,008		12,166			—			117,760
Equity in income (loss) of subsidiaries	118,174			2,869		73,975			(195,018		)	—
Net income (loss)	117,760			108,877		86,141			(195,018		)	117,760
Other comprehensive income	20			—		—			—			20
Comprehensive income (loss)	$	117,780		$	108,877	$	86,141		$	(195,018	)	$	117,780

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

For the three months ended June 30, 2015

($000’s omitted)



	Unconsolidated												Consolidated PulteGroup, Inc.
	PulteGroup, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated PulteGroup, Inc.
Revenues:
Homebuilding
Home sale revenues	$	—		$	1,243,077		$	—		$	—		$	1,243,077
Land sale revenues	—			6,460			—			—			6,460
	—			1,249,537			—			—			1,249,537
Financial Services	—			—			30,754			—			30,754
	—			1,249,537			30,754			—			1,280,291
Homebuilding Cost of Revenues:
Home sale cost of revenues	—			953,280			—			—			953,280
Land sale cost of revenues	—			5,312			—			—			5,312
	—			958,592			—			—			958,592
Financial Services expenses	101			(92		)	20,758			—			20,767
Selling, general, and administrative expenses	—			129,457			662			—			130,119
Other expense (income), net	198			3,139			(151		)	—			3,186
Intercompany interest	(6,781		)	9,269			(2,488		)	—			—
Income (loss) before income taxes and equity in income (loss) of subsidiaries	6,482			149,172			11,973			—			167,627
Income tax expense (benefit)	2,462			57,270			4,571			—			64,303
Income (loss) before equity in income (loss) of subsidiaries	4,020			91,902			7,402			—			103,324
Equity in income (loss) of subsidiaries	99,304			7,332			92,596			(199,232		)	—
Net income (loss)	103,324			99,234			99,998			(199,232		)	103,324
Other comprehensive income	21			—			—			—			21
Comprehensive income (loss)	$	103,345		$	99,234		$	99,998		$	(199,232	)	$	103,345

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

For the six months ended June 30, 2016

($000’s omitted)



	Unconsolidated											Consolidated PulteGroup, Inc.
	PulteGroup, Inc.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated PulteGroup, Inc.
Revenues:
Homebuilding
Home sale revenues	$	—		$	3,139,743	$	6,382		$	—		$	3,146,125
Land sale revenues	—			5,903		1,534			—			7,437
	—			3,145,646		7,916			—			3,153,562
Financial Services	—			—		78,930			—			78,930
	—			3,145,646		86,846			—			3,232,492
Homebuilding Cost of Revenues:
Home sale cost of revenues	—			2,456,168		7,670			—			2,463,838
Land sale cost of revenues	—			5,148		1,282			—			6,430
	—			2,461,316		8,952			—			2,470,268
Financial Services expenses	—			260		52,038			—			52,298
Selling, general, and administrative expenses	—			372,097		11,251			—			383,348
Other expense (income), net	340			30,434		(11,989		)	—			18,785
Intercompany interest	1,000			4,219		(5,219		)	—			—
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(1,340		)	277,320		31,813			—			307,793
Income tax expense (benefit)	(509		)	94,983		12,259			—			106,733
Income (loss) before equity in income (loss) of subsidiaries	(831		)	182,337		19,554			—			201,060
Equity in income (loss) of subsidiaries	201,891			9,879		185,893			(397,663		)	—
Net income (loss)	201,060			192,216		205,447			(397,663		)	201,060
Other comprehensive income	41			—		—			—			41
Comprehensive income (loss)	$	201,101		$	192,216	$	205,447		$	(397,663	)	$	201,101

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

For the six months ended June 30, 2015

($000’s omitted)



	Unconsolidated												Consolidated PulteGroup, Inc.
	PulteGroup, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated PulteGroup, Inc.
Revenues:
Homebuilding
Home sale revenues	$	—		$	2,331,235		$	—		$	—		$	2,331,235
Land sale revenues	—			24,002			—			—			24,002
	—			2,355,237			—			—			2,355,237
Financial Services	—			—			58,352			—			58,352
	—			2,355,237			58,352			—			2,413,589
Homebuilding Cost of Revenues:
Home sale cost of revenues	—			1,794,425			—			—			1,794,425
Land sale cost of revenues	—			18,691			—			—			18,691
	—			1,813,116			—			—			1,813,116
Financial Services expenses	288			(261		)	43,281			—			43,308
Selling, general, and administrative expenses	—			290,285			1,146			—			291,431
Other expense (income), net	373			2,431			(501		)	—			2,303
Intercompany interest	943			3,847			(4,790		)	—			—
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(1,604		)	245,819			19,216			—			263,431
Income tax expense (benefit)	(609		)	98,365			7,380			—			105,136
Income (loss) before equity in income (loss) of subsidiaries	(995		)	147,454			11,836			—			158,295
Equity in income (loss) of subsidiaries	159,290			11,669			144,659			(315,618		)	—
Net income (loss)	158,295			159,123			156,495			(315,618		)	158,295
Other comprehensive income	42			—			—			—			42
Comprehensive income (loss)	$	158,337		$	159,123		$	156,495		$	(315,618	)	$	158,337

CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2016

($000’s omitted)



	Unconsolidated											Consolidated PulteGroup, Inc.
	PulteGroup, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries		Consolidated PulteGroup, Inc.
Net cash provided by (used in) operating activities	$	143,228		$	(548,580	)	$	80,036		$	—	$	(325,316	)
Cash flows from investing activities:
Capital expenditures	—			(19,736		)	(1,308		)	—		(21,044		)
Cash used for business acquisitions	—			(430,025		)	—			—		(430,025		)
Other investing activities, net	(6		)	(10,346		)	2,056			—		(8,296		)
Net cash provided by (used in) investing activities	(6		)	(460,107		)	748			—		(459,365		)
Cash flows from financing activities:
Proceeds from debt issuance	986,084			—			—			—		986,084
Repayments of debt	(465,245		)	(19,729		)	—			—		(484,974		)
Borrowings under revolving credit facility	358,000			—			—			—		358,000
Repayments under revolving credit facility	(358,000		)	—			—			—		(358,000		)
Financial Services borrowings (repayments)	—			—			(78,320		)	—		(78,320		)
Stock option exercises	742			—			—			—		742
Share repurchases	(100,806		)	—			—			—		(100,806		)
Dividends paid	(63,019		)	—			—			—		(63,019		)
Intercompany activities, net	(500,978		)	556,203			(55,225		)	—		—
Net cash provided by (used in) financing activities	(143,222		)	536,474			(133,545		)	—		259,707
Net increase (decrease) in cash and equivalents	—			(472,213		)	(52,761		)	—		(524,974		)
Cash and equivalents at beginning of period	—			638,602			115,559			—		754,161
Cash and equivalents at end of period	$	—		$	166,389		$	62,798		$	—	$	229,187

CONSOLIDATING STATEMENT OF CASH FLOWS

For the six months ended June 30, 2015

($000’s omitted)



	Unconsolidated											Consolidated PulteGroup, Inc.
	PulteGroup, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries		Consolidated PulteGroup, Inc.
Net cash provided by (used in) operating activities	$	65,947		$	(325,154	)	$	68,104		$	—	$	(191,103	)
Cash flows from investing activities:
Capital expenditures	—			(20,871		)	(2,244		)	—		(23,115		)
Other investing activities, net	3,710			1,031			9,909			—		14,650
Net cash provided by (used in) investing activities	3,710			(19,840		)	7,665			—		(8,465		)
Cash flows from financing activities:
Repayments of debt	(237,994		)	—			—			—		(237,994		)
Financial Services borrowings (repayments)	—			—			(20,970		)	—		(20,970		)
Stock option exercises	7,222			—			—			—		7,222
Share repurchases	(322,066		)	—			—			—		(322,066		)
Dividends paid	(59,125		)	—			—			—		(59,125		)
Intercompany activities, net	534,852			(408,588		)	(126,264		)	—		—
Net cash provided by (used in) financing activities	(77,111		)	(408,588		)	(147,234		)	—		(632,933		)
Net increase (decrease) in cash and equivalents	(7,454		)	(753,582		)	(71,465		)	—		(832,501		)
Cash and equivalents at beginning of period	7,454			1,157,307			128,101			—		1,292,862
Cash and equivalents at end of period	$	—		$	403,725		$	56,636		$	—	$	460,361

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

Overview

Industry-wide new home sales continue to pace below historical averages, though improving demand conditions in the overall U.S. housing market generally continued through the first half of 2016. We remain pleased with the overall demand for new homes, which continues along a sustained, but slow recovery path supported by favorable demographics, ongoing employment and wage gains, low interest rates, and a limited supply of new homes. Within this environment, we remain focused on driving additional gains in construction and asset efficiency to deliver higher returns on invested capital. Consistent with our positive market view and long-term business strategy, we expect to use our capital to support future growth while consistently returning funds to shareholders through dividends and share repurchases.

We have looked toward 2016 as a year where we would begin adding volume growth to the efficiency gains we have achieved in recent years. Our prior investments are allowing us to grow the business, as evidenced by net new order dollars increasing 22% in the first half of 2016, as compared to the prior year, and our backlog increasing by 21% to $3.7 billion as of June 30, 2016, while also continuing to realize solid gross margin performance through our focus on community locations, strategic pricing, and construction efficiencies.

Our new community openings will continue at an elevated level in 2016. While we have experience opening new communities, starting up new communities can present a challenge in today's environment where entitlement and land development delays are common. We have grown our investment in the business in a disciplined manner by emphasizing smaller projects and working to shorten our years of land supply while expanding our use of land option agreements when possible. We have also focused our land investments on closer-in locations where we think demand is more sustainable when the market ultimately moderates. We have accepted the trade-off of having to pay more for certain land positions where we can be more confident in the future performance.

The following is a summary of our operating results by line of business ($000's omitted, except per share data):



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Income before income taxes:
Homebuilding	$	172,546	$	157,640	$	280,979	$	248,387
Financial Services	17,034		9,987		26,814		15,044
Income before income taxes	189,580		167,627		307,793		263,431
Income tax expense	71,820		64,303		106,733		105,136
Net income	$	117,760	$	103,324	$	201,060	$	158,295
Per share data - assuming dilution:
Net income	$	0.34	$	0.28	$	0.57	$	0.43

•

Homebuilding income before income taxes for the three and six months ended June 30, 2016 increased compared with the prior year period as the result of higher revenues stemming from increased volume and a higher average selling price. The revenue increase was partially offset by lower gross margins and higher overhead costs, both of which were partially attributable to the assets acquired from Wieland in January 2016 (see Note 1). Additionally, the three and six months ended June 30, 2015, include a reserve reversal of $26.9 million resulting from a favorable legal settlement (see Note 8).


•	Financial Services income before income taxes for the three and six months ended June 30, 2016 increased compared with the prior year periods due to an increase in origination volume resulting from higher volumes in the Homebuilding segment combined with higher revenues per loan, which were attributable to a higher average loan size combined with a favorable interest rate environment.


•	Our effective tax rate for the three and six months ended June 30, 2016 was 37.9% and 34.7%, respectively, which includes the favorable resolution of certain state income tax matters, compared to 38.4% and 39.9%, respectively, for the same periods in 2015, which reflected adjustments to deferred taxes due to changes in state laws and business operations.

Homebuilding Operations

The following presents selected financial information for our Homebuilding operations ($000’s omitted):



	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2016			2016 vs. 2015		2015			2016			2016 vs. 2015		2015
Home sale revenues	$	1,751,882		41	%	$	1,243,077		$	3,146,125		35	%	$	2,331,235
Land sale revenues	4,950			(23	)%	6,460			7,437			(69	)%	24,002
Total Homebuilding revenues	1,756,832			41	%	1,249,537			3,153,562			34	%	2,355,237
Home sale cost of revenues (a)	1,374,509			44	%	953,280			2,463,838			37	%	1,794,425
Land sale cost of revenues	4,403			(17	)%	5,312			6,430			(66	)%	18,691
Selling, general, and administrative expenses ("SG&A") (b)	192,333			48	%	130,119			383,348			32	%	291,431
Other expense (income), net	13,041			309	%	3,186			18,967			724	%	2,303
Income before income taxes	$	172,546		9	%	$	157,640		$	280,979		13	%	$	248,387

Supplemental data:
Gross margin from home sales	21.5		%	(180 bps)		23.3		%	21.7		%	(130 bps)		23.0		%
SG&A as a percentage of home sale revenues	11.0		%	50 bps		10.5		%	12.2		%	(30 bps)		12.5		%
Closings (units)	4,772			27	%	3,744			8,717			23	%	7,109
Average selling price	$	367		11	%	$	332		$	361		10	%	$	328
Net new orders (c):
Units	5,697			11	%	5,118			11,349			11	%	10,257
Dollars	$	2,142,024		21	%	$	1,766,848		$	4,255,995		22	%	$	3,475,238
Cancellation rate	14		%			13		%	14		%			12		%
Active communities at June 30									700			11	%	630
Backlog at June 30:
Units									9,679			8	%	8,998
Dollars									$	3,749,299		21	%	$	3,087,862


(a)	Includes the amortization of capitalized interest.


(b)	Includes a reserve reversal of $26.9 million for the three and six months ended June 30, 2015, resulting from a favorable legal settlement (see Note 8).


(c)	Net new orders excludes backlog acquired from Wieland in January 2016 (see Note 1). Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.

Home sale revenues

Home sale revenues for the three and six months ended June 30, 2016 were higher than the prior year periods by $508.8 million and $814.9 million, respectively. For the three months ended June 30, 2016, the 41% increase was attributable to an 11% increase in average selling price and a 27% increase in closings. For the six months ended June 30, 2016, the 35% increase was attributable to a 10% increase in average selling price and a 23% increase in closings, both of which include the communities acquired from Wieland during the period. For the three months ended June 30, 2016, such communities contributed 6% to the growth in revenue, 4% to the growth in closings and 2% to the increase in average selling price. For the six months ended June 30, 2016, the communities acquired from Wieland contributed 5% to the growth in revenue, 4% to the growth in closings and 1% to the increase in average selling price. Excluding the communities acquired from Wieland, the increase in closings reflects the significant investments we are making in opening new communities combined with improved demand. The higher average selling price for both the three and six months ended June 30, 2016 reflects an ongoing shift toward move-up buyers, the inclusion of higher-priced homes offered in Wieland communities, and generally stable market conditions.

Home sale gross margins

Home sale gross margins were 21.5% and 21.7% for the three and six months ended June 30, 2016, respectively, compared to 23.3% and 23.0% for the three and six months ended June 30, 2015, respectively. The assets acquired from Wieland contributed 70 basis points to this decrease for both periods, primarily as the result of required fair value adjustments associated with the acquired homes in production and related lots. Gross margins remain strong relative to historical levels and reflect a combination of factors, including shifts in community mix, relatively stable pricing conditions, and lower amortized interest costs (1.7% and 1.8% for the three and six months ended June 30, 2016, respectively, compared to 2.7% and 2.8% for the same periods in 2015), offset by higher house construction and land costs. The lower amortized interest costs resulted from the reduction in our outstanding debt in recent years. We anticipate that our amortized interest costs as a percentage of revenues will remain below 2015 levels for the remainder of 2016, even after consideration of the offering of senior notes completed in February 2016 (see Note 4).

Land sales

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales had margin contributions of $0.5 million and $1.0 million for the three and six months ended June 30, 2016, respectively, compared to $1.1 million and $5.3 million for the three and six months ended June 30, 2015, respectively.

SG&A

SG&A as a percentage of home sale revenues was 11.0% and 12.2% for the three and six months ended June 30, 2016, respectively, compared with 10.5% and 12.5% for the three and six months ended June 30, 2015, respectively. The gross dollar amount of our SG&A increased $62.2 million, or 48%, for the three months ended June 30, 2016 compared to June 30, 2015, and $91.9 million, or 31.5%, for the six months ended June 30, 2016. The three and six months ended June 30, 2015, benefited from a reserve reversal of $26.9 million resulting from a favorable legal settlement (see Note 8). Excluding this reserve reversal, the increase in gross dollar SG&A reflects the addition of field resources and other variable costs related to increased production volumes combined with higher costs related to healthcare and professional fees. Additionally, SG&A for the six months ended June 30, 2016 reflects the impact of transaction ($4.0 million) and integration costs associated with the assets acquired from Wieland in January 2016.

Equity in earnings of unconsolidated entities

Equity in earnings of unconsolidated entities was $3.8 million and $4.0 million for the three and six months ended June 30, 2016, respectively, compared with $1.2 million and $2.3 million for the three and six months ended June 30, 2015, respectively. The majority of our unconsolidated entities represent land development joint ventures. As a result, the timing of income and losses varies between periods depending on the timing of transactions and circumstances specific to each entity.

Other expense, net

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



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Write-off of deposits and pre-acquisition costs	$	7,414		$	1,241		$	10,454		$	3,110
Lease exit and related costs	7,311			336			5,946			222
Amortization of intangible assets	3,450			3,225			6,900			6,450
Interest income	(849		)	(856		)	(1,772		)	(1,955		)
Interest expense	186			208			360			395
Equity in earnings of unconsolidated entities	(3,829		)	(1,164		)	(4,004		)	(2,271		)
Miscellaneous, net	(642		)	196			1,083			(3,648		)
	$	13,041		$	3,186		$	18,967		$	2,303

The increase in write-offs of deposits and pre-acquisition costs for the three and six months ended June 30, 2016 related primarily to one project in California that we elected to not complete. The increase in lease exit and related costs for the three and six months ended June 30, 2016 resulted from the substantial completion of our corporate headquarters relocation from Michigan to Georgia, which began in 2013.

Net new orders

Net new order units increased 11% for the three months ended June 30, 2016, compared with the three months ended June 30, 2015. For the three months ended June 30, 2016, the communities acquired from Wieland contributed to this growth in units by 3%. For the six months ended June 30, 2016, net new order units increased by 11%. Wieland's contribution to this growth was 3%. Excluding the Wieland assets, our growth in net new order units resulted from the higher number of active communities. Net new orders in dollars increased by 21% and 22% for the three and six months ended June 30, 2016, respectively, compared to the same periods in 2015 due to the growth in units combined with the higher average selling price. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 14% for both the three and six months ended June 30, 2016, respectively, compared to 13% and 12% for the same periods in 2015. Ending backlog units and dollars, which represent orders for homes that have not yet closed, increased 8% and 21%, respectively, at June 30, 2016 compared with June 30, 2015, as a result of the higher net new order volume. The growth in backlog dollars was also impacted by the higher average selling price.

Homes in production

The following is a summary of our homes in production at June 30, 2016 and June 30, 2015:



	June 30, 2016	June 30, 2015
Sold	6,673	5,635
Unsold
Under construction	1,459	830
Completed	555	314
	2,014	1,144
Models	1,084	988
Total	9,771	7,767

The number of homes in production at June 30, 2016 was 26% higher than at June 30, 2015 due to a number of factors, including the higher net new order volume and backlog and a decision to purposefully increase the number of unsold homes under construction ("spec homes"). The increase in spec homes reflects our intention to achieve a more even production cycle over the course of 2016 compared with 2015. Though inventory levels will fluctuate throughout the year, we expect our overall level of spec home starts to moderate over the year. As part of our inventory management strategies, we will continue to maintain reasonable inventory levels relative to demand in each of our markets.

Controlled lots

The following is a summary of our lots under control at June 30, 2016 and December 31, 2015:



	June 30, 2016						December 31, 2015
	Owned		Optioned		Controlled		Owned		Optioned		Controlled
Northeast	6,376		4,518		10,894		6,361		4,114		10,475
Southeast (a)	16,916		7,790		24,706		11,161		7,933		19,094
Florida	22,035		8,044		30,079		21,230		9,636		30,866
Midwest	12,834		7,449		20,283		13,093		6,985		20,078
Texas	13,455		8,398		21,853		13,308		7,052		20,360
West	30,795		4,643		35,438		30,766		6,440		37,206
Total	102,411		40,842		143,253		95,919		42,160		138,079

Developed (%)	28	%	17	%	25	%	28	%	12	%	23	%


(a)	Southeast includes the acquisition of substantially all of the assets of Wieland in January 2016 (see Note 1).

Of our controlled lots, 102,411 and 95,919 were owned and 40,842 and 42,160 were controlled under land option agreements at June 30, 2016 and December 31, 2015, respectively. While competition for well-positioned land is robust, we continue to pursue strategic land positions that drive appropriate returns on invested capital. The remaining purchase price under our land option agreements totaled $2.1 billion at June 30, 2016. These land option agreements, which generally may be canceled at our discretion and in certain cases extend over several years, are secured by deposits and pre-acquisition costs totaling $178.8 million at June 30, 2016, of which $7.9 million is refundable.

Homebuilding Segment Operations

As of June 30, 2016, we conducted our operations in 48 markets located throughout 25 states. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:



Northeast:		Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Virginia
Southeast:		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida
Midwest:		Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Ohio
Texas:		Texas
West:		Arizona, California, Nevada, New Mexico, Washington

The following tables present selected financial information for our reportable Homebuilding segments:



	Operating Data by Segment ($000's omitted)
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2016			2016 vs. 2015		2015			2016			2016 vs. 2015		2015
Home sale revenues:
Northeast	$	152,482		11	%	$	136,931		$	271,136		10	%	$	246,694
Southeast (a)	386,626			58	%	245,251			680,050			58	%	431,039
Florida	280,678			35	%	207,856			550,379			34	%	410,396
Midwest	286,231			28	%	223,636			475,378			18	%	401,510
Texas	254,785			37	%	185,489			467,477			29	%	361,935
West	391,080			60	%	243,914			701,705			46	%	479,661
	$	1,751,882		41	%	$	1,243,077		$	3,146,125		35	%	$	2,331,235
Income (loss) before income taxes:
Northeast	$	19,238		25	%	$	15,330		$	28,828		16	%	$	24,857
Southeast (a)	40,758			2	%	39,871			60,528			(6	)%	64,495
Florida	44,353			13	%	39,315			84,655			17	%	72,539
Midwest	26,253			79	%	14,630			31,873			102	%	15,810
Texas	36,223			48	%	24,488			64,740			37	%	47,278
West	41,829			29	%	32,441			75,336			19	%	63,521
Other homebuilding (b)	(36,108		)	(328	)%	(8,435		)	(64,981		)	(62	)%	(40,113		)
	$	172,546		9	%	$	157,640		$	280,979		13	%	$	248,387
Closings (units):
Northeast	310			(2	)%	316			572			1	%	564
Southeast (a)	1,025			33	%	772			1,851			34	%	1,384
Florida	767			28	%	597			1,512			26	%	1,198
Midwest	786			19	%	659			1,338			9	%	1,228
Texas	923			22	%	754			1,698			13	%	1,500
West	961			49	%	646			1,746			41	%	1,235
	4,772			27	%	3,744			8,717			23	%	7,109
Average selling price:
Northeast	$	492		14	%	$	433		$	474		8	%	$	437
Southeast (a)	377			19	%	318			367			18	%	311
Florida	366			5	%	348			364			6	%	343
Midwest	364			7	%	339			355			9	%	327
Texas	276			12	%	246			275			14	%	241
West	407			8	%	378			402			3	%	388
	$	367		11	%	$	332		$	361		10	%	$	328


(a)	Southeast includes the acquisition of substantially all of the assets of Wieland in January 2016 (see Note 1).


(b)	Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. Other homebuilding for the three and six months ended June 30, 2015, also includes a reserve reversal of $26.9 million resulting from a favorable legal settlement (see Note 8).



	Operating Data by Segment ($000's omitted)
	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2016			2016 vs. 2015		2015			2016			2016 vs. 2015		2015
Net new orders - units:
Northeast	352			(21	)%	443			730			(17	)%	880
Southeast (a)	1,016			(2	)%	1,041			2,068			4	%	1,979
Florida	1,011			26	%	805			1,934			13	%	1,716
Midwest	1,059			28	%	830			2,053			29	%	1,593
Texas	1,036			4	%	993			2,157			2	%	2,110
West	1,223			22	%	1,006			2,407			22	%	1,979
	5,697			11	%	5,118			11,349			11	%	10,257
Net new orders - dollars:
Northeast	$	175,454		(8	)%	$	191,046		$	362,730		(6	)%	$	387,302
Southeast (a)	387,650			11	%	347,934			783,978			22	%	643,040
Florida	380,573			32	%	287,358			719,258			16	%	617,613
Midwest	381,611			28	%	299,162			743,752			30	%	573,717
Texas	287,055			7	%	269,089			593,633			10	%	541,082
West	529,681			42	%	372,259			1,052,644			48	%	712,484
	$	2,142,024		21	%	$	1,766,848		$	4,255,995		22	%	$	3,475,238
Cancellation rates:
Northeast	11		%			10		%	10		%			10		%
Southeast (a)	14		%			8		%	13		%			8		%
Florida	11		%			11		%	11		%			10		%
Midwest	11		%			12		%	11		%			12		%
Texas	17		%			17		%	16		%			15		%
West	19		%			17		%	16		%			15		%
	14		%			13		%	14		%			12		%
Unit backlog:
Northeast									602			(23	)%	777
Southeast (a)									1,679			7	%	1,563
Florida									1,696			12	%	1,520
Midwest									1,804			16	%	1,553
Texas									1,804			(4	)%	1,883
West									2,094			23	%	1,702
									9,679			8	%	8,998
Backlog dollars:
Northeast									$	303,127		(15	)%	$	356,584
Southeast (a)									690,357			35	%	513,034
Florida									659,161			18	%	557,185
Midwest									650,735			20	%	542,244
Texas									501,816			2	%	490,571
West									944,103			50	%	628,244
									$	3,749,299		21	%	$	3,087,862


(a)	Southeast includes the acquisition of substantially all of the assets of Wieland in January 2016 (see Note 1).

Northeast

For the second quarter of 2016, Northeast home sale revenues increased 11% compared with the prior year period due to a 14% increase in the average selling price offset by a 2% decrease in closings. The increase in average selling price was mainly in the Northeast Corridor and New England. The decrease in closings occurred mainly in Northeast Corridor and New England, while the Mid-Atlantic increased. Net new orders decreased 21%, primarily in the Northeast Corridor and Mid-Atlantic.

For the six months ended June 30, 2016, Northeast home sale revenues increased 10% compared with the prior year period due to a 1% increase in closings and an 8% increase in the average selling price. The increase in closings was concentrated in the Northeast Corridor and the Mid-Atlantic, and the increase in average selling price occurred across all divisions. The increased income before income taxes resulted from higher revenues and gross margins. Net new orders decreased 17% reflecting reduced order levels across all divisions.

Southeast

In 2016, the Southeast was significantly impacted by the acquisition of substantially all of the assets of Wieland in January 2016 (see Note 1). For the second quarter of 2016, Southeast home sale revenues increased 58% compared with the prior year period due to a 19% increase in the average selling price combined with a 33% increase in closings. The increase in average selling price and the increase in closing volumes occurred across all divisions, and are largely due to contributions from the assets acquired from Wieland. Income before income taxes increased slightly due to increased revenues and gross margins. Net new orders decreased 2%, primarily due to lower order levels in Raleigh and Charlotte.

For the six months ended June 30, 2016, Southeast home sale revenues increased 58% compared with the prior year as the result of an increase in closings and average selling prices of 34% and 18%, respectively. These increases are largely due to contributions from the assets acquired from Wieland. Excluding those closings, revenues still increased significantly compared with the prior year, and occurred across all operating divisions. Income before income taxes decreased 6% as result of transaction ($4.0 million) and integration costs associated with the assets acquired from Wieland. Net new orders increased 4%, primarily due to the assets acquired from Wieland.

Florida

For the second quarter of 2016, Florida home sale revenues increased 35% compared with the prior year period due to a 28% increase in closings combined with a 5% increase in the average selling price. The increase in closings and average selling price occurred across all divisions. Income before income taxes increased primarily due to the higher revenues. Net new orders increased 26%, reflecting improved order levels across all divisions.

For the six months ended June 30, 2016, Florida home sale revenues increased 34% compared with the prior year

period due to a 6% increase in the average selling price combined with a 26% increase in closings. Income before income taxes increased primarily due to the higher revenues. Net new orders increased 13% due largely to a greater number of active communities in North Florida.

Midwest

For the second quarter of 2016, Midwest home sale revenues increased 28% compared with the prior year period due to a 7% increase in average selling price combined with a 19% increase in closings. The higher revenues occurred across all divisions. The increased revenues led to an increase in income before income taxes. Net new orders increased 28% on a 7% increase in active communities. Net new orders increased across all divisions.

For the six months ended June 30, 2016, Midwest home sale revenues increased 18% compared with the prior year period due to a 9% increase in average selling price combined with a 9% increase in closings. The higher revenues occurred across all divisions. Net new orders increased across all divisions.

Texas

For the second quarter of 2016, Texas home sale revenues increased 37% compared with the prior year period due to a 22% increase in closings combined with a 12% increase in the average selling price. The increase in average selling price was broad-based across all divisions, with the exception of Houston, where we experienced a mix shift towards first-time home buyers. The increase in closings occurred across all divisions, but primarily in Central Texas and Dallas. The increased revenues and increased closings led to an increase in income before income taxes. Net new orders increased overall by 4%, primarily in Central Texas offset by decreases in Dallas and San Antonio.

For the six months ended June 30, 2016, Texas home sale revenues increased 29% compared with the prior year period due to a 13% increase in closings combined with a 14% increase in the average selling price. The increase in average selling price was broad-based across all divisions, while the increase in closings occurred across all divisions with the exception of San Antonio. The higher revenues and higher closings led to an increase in income before income taxes. Net new orders increased 2%, with an increase in Dallas and Central Texas offset by softer demand in Houston and San Antonio.

West

For the second quarter of 2016, West home sale revenues increased 60% compared with the prior year period due to a 49% increase in closings combined with an 8% increase in average selling price. The increased closings and higher average selling price occurred across all major geographies. Income before income taxes increased due to higher revenues offset by lower gross margins. Net new orders showed a broad-based increase of 22%, primarily in the Pacific Northwest and partially due to a 13% increase in active communities.

For the six months ended June 30, 2016, West home sale revenues increased 46% compared with the prior year period due to a 41% increase in closings combined with a 3% increase in average selling price. The increased closings and higher average selling price were broad-based. Income before income taxes increased as a result of higher revenues offset by lower gross margins. Net new orders increased 22% and occurred across all divisions. This increase was partially due to the increase in active communities.

Financial Services Operations

We conduct our Financial Services operations, which include mortgage and title operations, through Pulte Mortgage and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to supporting our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding. Our Homebuilding customers continue to account for substantially all loan production. We believe that our capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model. The following tables present selected financial information for our Financial Services operations ($000's omitted):



	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2016			2016 vs. 2015		2015		2016			2016 vs. 2015		2015
Mortgage operations revenues	$	33,526		38	%	$	24,279	$	61,842		33	%	$	46,392
Title services revenues	9,556			48	%	6,475		17,088			43	%	11,960
Total Financial Services revenues	43,082			40	%	30,754		78,930			35	%	58,352
Expenses	26,180			26	%	20,767		52,298			21	%	43,308
Other expense (income), net	(132		)	100	%	—		(183		)	100	%	—
Income before income taxes	$	17,034		71	%	$	9,987	$	26,814		78	%	$	15,044
Total originations:
Loans	3,158			26	%	2,507		5,706			23	%	4,623
Principal	$	868,671		37	%	$	635,153	$	1,535,317		34	%	$	1,149,941



	Six Months Ended
	June 30,
	2016			2015
Supplemental data:
Capture rate	80.8		%	82.5		%
Average FICO score	750			750
Loan application backlog	$	1,986,093		$	1,732,702
Funded origination breakdown:
FHA	10		%	11		%
VA	12		%	13		%
USDA	1		%	1		%
Other agency	70		%	70		%
Total agency	93		%	95		%
Non-agency	7		%	5		%
Total funded originations	100		%	100		%

Revenues

Total Financial Services revenues for the three and six months ended June 30, 2016 increased 40% and 35%, respectively, when compared to the same periods in 2015. These changes were primarily related to higher loan origination volume resulting from higher volumes in the Homebuilding segment combined with higher revenues per loan, which were attributable to a higher average loan size combined with a favorable interest rate environment.

Income before income taxes

Income before income taxes for the three and six months ended June 30, 2016 increased 71% and 78%, respectively, when compared to the prior year periods. This increase resulted primarily from the 40% increase in revenues and better overhead leverage as expenses only increased 26%.

Income Taxes

Liquidity and Capital Resources

We finance our land acquisition, development, and construction activities and financial services operations using internally-generated funds supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing other available financing sources, including revolving bank credit and securities offerings, and may determine that modifications to our financing are appropriate.

At June 30, 2016, we had unrestricted cash and equivalents of $229.2 million, senior notes of $2.1 billion, and borrowings of $499.2 million under a term loan (net of discounts and issuance costs). We also had restricted cash balances of $26.5 million. We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a broad portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term deposits and investments. We monitor our investments with each bank and do not believe our cash and equivalents are exposed to any material risk of loss. However, there can be no assurances that losses of principal balance on our cash and equivalents will not occur.

Our ratio of debt to total capitalization, excluding our Financial Services debt, was 35.1% at June 30, 2016.

Senior unsecured notes

In February 2016, we issued $1.0 billion of senior unsecured notes, consisting of $300 million of 4.25% senior notes due March 1, 2021, and $700 million of 5.50% senior notes due March 1, 2026. The net proceeds from the senior notes issuance were used to fund the retirement of $465.2 million of our senior notes that matured in May 2016, with the remaining net proceeds used for general corporate purposes.

Revolving credit facility

Term loan

On September 30, 2015, we entered into a senior unsecured $500.0 million term loan agreement (the “Term Loan”) with an initial maturity date of January 3, 2017, which can be extended at our option up to 12 months. The interest rate on the Term Loan may be based on either LIBOR or a base rate plus an applicable margin, as defined. Borrowings are interest only with the principal being due at the maturity date and are guaranteed by the same wholly-owned subsidiaries as under the Revolving Credit Facility. The Term Loan contains customary affirmative and negative covenants for loans of this type, including the same financial covenants as under the Revolving Credit Facility. As of June 30, 2016, we were in compliance with all covenants.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties that totaled $17.2 million at June 30, 2016 and $35.3 million at December 31, 2015. These notes have maturities ranging up to four years, are collateralized by the applicable land positions to which they relate, have no recourse to any other assets, and are classified within accrued and other liabilities. The stated interest rates on these notes range up to 5.00%.

Pulte Mortgage

Dividends and share repurchase program

During the six months ended June 30, 2016, we declared cash dividends totaling $62.7 million and repurchased 5.6 million shares under our repurchase authorization for a total of $97.7 million. Such repurchases are reflected as reductions of common stock and retained earnings. At June 30, 2016, we had remaining authorization to repurchase $507.1 million of common shares. On July 20, 2016, our Board of Directors approved a $1.0 billion increase in our share repurchase authorization, raising our total authorization to $1.5 billion. We plan to repurchase $250.0 million of shares in each of the third and fourth quarters of 2016 and $1.0 billion of shares in 2017.

Cash flows

Operating activities

Our net cash used in operating activities for the six months ended June 30, 2016 was $325.3 million, compared with net cash used in operating activities of $191.1 million for the six months ended June 30, 2015. Generally, the primary drivers of our cash flow from operations are profitability and changes in inventory levels. The negative cash flow from operations for the six months ended June 30, 2016 was primarily due to a net increase in inventories of $810.4 million resulting from an increase in land acquisition and development investment, combined with a seasonal build of house inventory. These uses of cash were partially offset by our pretax income of $307.8 million combined with a seasonal reduction of $78.5 million in residential mortgage loans available-for-sale.

Our negative cash flow from operations for the six months ended June 30, 2015, was primarily due to a net increase in inventories of $485.7 million resulting from increased investment, partially offset by our pretax income of $263.4 million combined with a seasonal reduction of $70.1 million in residential mortgage loans available-for-sale.

Investing activities

Investing activities are generally not a significant source or use of cash for us. Net cash used by investing activities for the six months ended June 30, 2016 was $459.4 million, compared with net cash used by investing activities of $8.5 million for the six months ended June 30, 2015. The cash used in investing activities for the six months ended June 30, 2016 was primarily due to the acquisition of certain real estate assets from Wieland (see Note 1).

Financing activities

Net cash provided by financing activities for the six months ended June 30, 2016 totaled $259.7 million, compared with net cash used in financing activities of $632.9 million for the six months ended June 30, 2015. The net cash used in financing activities for the six months ended June 30, 2016 resulted primarily from the retirement of $465.2 million of our senior notes that matured in May 2016, the repurchase of 5.6 million common shares for $97.7 million under our repurchase authorization, payment of $63.0 million in cash dividends, and net repayments of $78.3 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale. These uses of cash were offset by the proceeds of the senior unsecured notes issuance for $986.1 million. Net cash used in financing activities for the six months ended ended June 30, 2015 resulted primarily from the retirement of $238.0 million of our senior notes at their scheduled maturity date, $21.0 million of net repayments under the Repurchase Agreement, and the repurchase of 15.3 million common shares for $313.0 million under our repurchase authorization.

Inflation

We, and the homebuilding industry in general, may be adversely affected during periods of inflation because of higher land and construction costs. Inflation may also increase our financing costs. In addition, higher mortgage interest rates affect the affordability of our products to prospective homebuyers. While we attempt to pass on to our customers increases in our costs through increased sales prices, market forces may limit our ability to do so. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins, and net income could be adversely affected.

Seasonality

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we historically experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations during the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year.

Contractual Obligations and Commercial Commitments

We issued $1.0 billion of senior unsecured notes in February 2016. The repayment terms are described in Note 4. We also retired $465.2 million of our senior notes that matured in May 2016. There have been no other material changes to our contractual obligations from those disclosed in our "Contractual Obligations and Commercial Commitments" contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Off-Balance Sheet Arrangements

We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our homebuilding projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. At June 30, 2016, we had outstanding letters of credit totaling $227.2 million. Our surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $1.1 billion at June 30, 2016, are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. At June 30, 2016, these agreements had an aggregate remaining purchase price of $2.1 billion. 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.

At June 30, 2016, aggregate outstanding debt of unconsolidated joint ventures was $9.8 million, of which our proportionate share was $3.7 million. Of this amount, we provided limited recourse guaranties for less than $0.3 million at June 30, 2016.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2016 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative disclosure

We are subject to market risk on our debt instruments primarily due to fluctuations in interest rates. We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair value of the debt instrument but not our earnings or cash flows. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair value of the debt instrument but could affect our earnings and cash flows. Except in very limited circumstances, we do not have an obligation to prepay fixed-rate debt prior to maturity. As a result, interest rate risk and changes in fair value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance or repurchase such debt.

The following tables set forth the principal cash flows by scheduled maturity, weighted-average interest rates, and estimated fair value of our debt obligations as of June 30, 2016 ($000’s omitted):



	As of June 30, 2016 for the Years ending December 31,
	2016			2017			2018			2019			2020			Thereafter			Total			Fair Value
Rate-sensitive liabilities:
Fixed rate debt	$	1,767		$	130,660		$	—		$	3,900		$	3,900		$	2,000,000		$	2,140,227		$	2,221,857
Average interest rate	—		%	7.33		%	—		%	5.00		%	5.00		%	5.92		%	6.00		%

Variable rate debt (a)	$	189,557		$	500,000		$	—		$	—		$	—		$	—		$	689,557		$	689,557
Average interest rate	2.81		%	1.51		%	—		%	—		%	—		%	—		%	1.87		%

(a) Includes the Pulte Mortgage Repurchase Agreement and the Term Loan. Does not include our Revolving Credit Facility, under which there were no borrowings outstanding at either June 30, 2016 or December 31, 2015.

Qualitative disclosure

There have been no material changes to the qualitative disclosure found in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2015.

SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS

As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or implied by, these statements. You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “may,” “can,” “could,” “might,” “will” and similar expressions identify forward-looking statements, including statements related to expected operating and performing results, planned transactions, planned objectives of management, future developments or conditions in the industries in which we participate and other trends, developments and uncertainties that may affect our business in the future.

Such risks, uncertainties and other factors include, among other things: interest rate changes and the availability of mortgage financing; continued volatility in the debt and equity markets; competition within the industries in which we operate; the availability and cost of land and other raw materials used by us in our homebuilding operations; the impact of any changes to our strategy in responding to the cyclical nature of the industry, including any changes regarding our land positions and the rate of growth in land spend; the availability and cost of insurance covering risks associated with our businesses; shortages and the cost of labor; weather related slowdowns; slow growth initiatives and/or local building moratoria; governmental regulation directed at or affecting the housing market, the homebuilding industry or construction activities; uncertainty in the mortgage lending industry, including revisions to underwriting standards and repurchase requirements associated with the sale of mortgage loans; the interpretation of or changes to tax, labor and environmental laws; economic changes nationally or in our local markets, including inflation, deflation, changes in consumer confidence and preferences and the state of the market for homes in general; legal or regulatory proceedings or claims; our ability to generate sufficient cash flow in order to successfully implement our capital allocation priorities; required accounting changes; terrorist acts and other acts of war; and other factors of national, regional and global scale, including those of a political, economic, business and competitive nature. See PulteGroup's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and other public filings with the Securities and Exchange Commission (the “SEC”) for a further discussion of these and other risks and uncertainties applicable to our businesses. We undertake no duty to update any forward-looking statement, whether as a result of new information, future events or changes in our expectations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management, including our Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2016. Based upon, and as of the date of that evaluation, our Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2016.

Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There was no change in our internal control over financial reporting during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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

Issuer Purchases of Equity Securities



	Total number of shares purchased (1)	Average price paid per share (1)		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs ($000’s omitted)
April 1, 2016 to April 30, 2016	770,567	$	18.29	768,783	$	540,703	(2)
May 1, 2016 to May 31, 2016	916,023	$	18.32	895,638	$	524,297	(2)
June 1, 2016 to June 30, 2016	907,443	$	18.94	907,443	$	507,109	(2)
Total	2,594,033	$	18.53	2,571,864


(1)	During the second quarter of 2016, a total of 22,169 shares were surrendered by employees for payment of minimum tax obligations upon the vesting or exercise of previously granted share-based compensation awards. Such shares were not repurchased as part of our publicly-announced share repurchase programs.


(2)	The Board of Directors approved share repurchase authorizations totaling $750.0 million and $300.0 million in October 2014 and December 2015, respectively. During the six months ended June 30, 2016, we repurchased 5.6 million shares for a total of $97.7 million. The share repurchase authorization has $507.1 million remaining as of June 30, 2016. There is no expiration date for this program.

Item 5. Other Information

On July 20, 2016, the Company entered into a letter agreement (the “Agreement”) with Elliott Associates, L.P., a Delaware limited partnership, and Elliott International, L.P., a Cayman Islands limited partnership (collectively, “Elliott”). Pursuant to the Agreement, the Company agreed to (i) expand the size of the Board to 13 members, (ii) appoint each of John Peshkin, Josh Gotbaum and Scott Powers (the “Nominees”) to fill the three director vacancies created, each with a term expiring at the Company’s 2017 annual meeting of shareholders, (iii) subject to certain exceptions, include Josh Gotbaum and Scott Powers on its slate of nominees for election at such meeting and (iv) limit the size of the Board to no more than 13 directors during the one-year period following the date of the Agreement, subject to certain exceptions pursuant to which the Board may be increased to 14 directors.

Under the terms of the Agreement, subject to certain conditions, Elliott agreed to vote, or cause to be voted, all of the Company’s common shares owned by Elliott or its controlling or controlled affiliates (i) in favor of Josh Gotbaum, or such replacement as provided under the Agreement, as a director nominee nominated by the Board at an annual or special meeting of shareholders (or proposed as an action by written consent), (ii) against (or withhold votes in favor of) the election of director nominees that that are not nominated by the Board and (iii) in accordance with the Board’s recommendations on all other proposals and business before such annual or special meeting of shareholders (or proposed as an action by written consent), other than with respect to Extraordinary Transactions (defined below), issuances of the Company’s common shares, approval of compensatory arrangements for employees or the members of the Board that are submitted for shareholder approval, and any proposal by the Company to implement any takeover defense measures or any other proposal by the Company that would diminish or otherwise impair in any material respect the rights of Company shareholders.

In addition, Elliott agreed to certain standstill restrictions until the first anniversary of the date of the Agreement, which restrictions include, among other things, that Elliott will not, and shall cause its respective affiliates and their respective principals, directors, general partners, managing members, managers, officers, employees, agents and representatives acting on its behalf, not to (i) engage in any solicitation of proxies or consents with respect to the election or removal of directors of the Company or any other matter or proposal, (ii) form, join or participate in any way in any group with respect to any Company common shares, (iii) acquire Company common shares or beneficial ownership thereof if such acquisition would result in Elliott having beneficial ownership of more than 4.8% of the total number of outstanding Company common shares or

ownership (whether beneficial ownership or economic exposure) of more than 9.9% of the total number of outstanding Company common shares, (iv) make or participate in any tender offer, exchange offer, merger, consolidation, acquisition, business combination, sale of a division, sale of substantially all assets, recapitalization, restructuring, liquidation, dissolution or other similar extraordinary transaction (each an “Extraordinary Transaction”), (v) seek, alone or in concert with others, representation on the Board or the removal of any member of the Board, except as provided in the Agreement or (vi) make any shareholder proposal. However, such standstill restrictions will not prevent Elliott from making (i) public or private statements or announcements with respect to any Extraordinary Transaction publicly announced by the Company or a third party, (ii) public or private statements with respect to the Company’s business and operations, other than statements that are negative with respect to the Company or the Board, (iii) factual statements as required by applicable legal process, subpoena or other legal requirement or in response to a request for information from a governmental authority or (iv) public or private statements regarding the Company’s execution of and compliance with the Agreement.

The standstill restrictions terminate automatically upon the earlier to occur of (a) the first anniversary of the date of the Agreement, (b) the fifth business day after Elliott's delivery of written notice to the Company of a material breach of the Agreement by the Company, if such breach has not been cured within such notice period, (c) the announcement by the Company of a definitive agreement with respect to an Extraordinary Transaction that would result in the acquisition by any person or group of more than 50% of the Company common shares, (d) the commencement of any tender or exchange offer that, if consummated, would constitute an Extraordinary Transaction that would result in the acquisition by any person or group of more than 50% of the Company common shares, where the Company files a Schedule 14D-9 (or any amendment thereto) that does not recommend that the Company’s shareholders reject such tender or exchange offer, (e) such time as the Company issues a preliminary proxy statement, definitive proxy statement or other proxy materials in connection with the 2017 Annual Meeting of Shareholders that are inconsistent with the Company’s obligations under the Agreement, or (f) the adoption by the Board of any amendment to the Restated Certificate of Incorporation or Amended and Restated By-Laws of the Company that would reasonably be expected to substantially impair the ability of a shareholder to submit nominations for election to the Board or shareholder proposals in connection with any future Company Annual Meeting of Shareholders.

Until the first anniversary of the date of the Agreement or until such earlier termination of the Agreement, each of the Company and Elliott agreed not to make or cause to be made, and to cause their respective affiliates and its and their respective principals, directors, general partners, members, managers, officers and employees not to make or cause to be made, any expression, statement or announcement that constitutes an ad hominem attack on, or otherwise disparages, defames, slanders, or impugns or is reasonably likely to damage the reputation of the other party and its affiliates and other related parties, including in the case of statements or announcements by Elliott as to the Company’s and its direct and indirect subsidiaries’ strategies, operations, products, performance or services.

The foregoing summary of the Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreement, a copy of which is attached as Exhibit 10(d) and is incorporated herein by reference.

On July 21, 2016, we also announced that we are taking actions to lower our selling, general, and administrative spend from an expected 10% of home sale revenues in 2016 to a targeted rate of 9% or less of 2017 home sale revenues.

Item 6. Exhibits

Exhibit Number and Description



3	(a)	Restated Articles of Incorporation, of PulteGroup, Inc. (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed with the SEC on August 18, 2009)

	(b)	Certificate of Amendment to the Articles of Incorporation, dated March 18, 2010 (Incorporated by reference to Exhibit 3(b) of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010)

	(c)	Certificate of Amendment to the Articles of Incorporation, dated May 21, 2010 (Incorporated by reference to Exhibit 3(c) of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010)

	(d)	By-laws, as amended, of PulteGroup, Inc. (Incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K, filed with the SEC on May 6, 2016)

	(e)	Certificate of Designation of Series A Junior Participating Preferred Shares, dated August 6, 2009 (Incorporated by reference to Exhibit 3(b) of our Registration Statement on Form 8-A, filed with the SEC on August 18, 2009)

4	(a)	Any instrument with respect to long-term debt, where the securities authorized thereunder do not exceed 10% of the total assets of PulteGroup, Inc. and its subsidiaries, has not been filed. The Company agrees to furnish a copy of such instruments to the SEC upon request.

	(b)	Amended and Restated Section 382 Rights Agreement, dated as of March 18, 2010, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent, which includes the Form of Rights Certificate as Exhibit B thereto (Incorporated by reference to Exhibit 4 of PulteGroup, Inc.’s Registration Statement on Form 8-A/A, filed with the SEC on March 23, 2010)

	(c)	First Amendment, dated as of March 14, 2013, to the Amended and Restated Section 382 Rights Agreement, dated as of March 18, 2010, between the Company and Computershare Trust Company, N.A., as rights agent (Incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed with the SEC on March 15, 2013)

	(d)	Second Amendment to Amended and Restated Section 382 Rights Agreement, dated as of March 10, 2016, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent (Incorporated by reference to Exhibit 4.1 of PulteGroup, Inc.’s Current Report on Form 8-K, filed with the SEC on March 10, 2016)

10	(a)	Second Amendment to Amended and Restated Master Repurchase Agreement dated June 24, 2016 (Incorporated by reference to Exhibit 10.1 of PulteGroup, Inc.'s Current Report on Form 8-K, filed with the SEC on June 29, 2016)

	(b)	Amended and Restated Credit Agreement dated as of June 30, 2016 among PulteGroup, Inc., as Borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer, and the other Lenders party thereto (Incorporated by reference to Exhibit 10.1 of PulteGroup, Inc.'s Current Report on Form 8-K, filed with the SEC on July 1, 2016)

	(c)	First Amendment to the Term Loan Agreement dated as of June 30, 2016 among PulteGroup, Inc., as Borrower, Bank of America, N.A., as Administrative Agent, and the other Lenders party thereto (Incorporated by reference to Exhibit 10.2 of PulteGroup, Inc.'s Current Report on Form 8-K, filed with the SEC on July 1, 2016)

	(d)	Letter Agreement, dated July 20, 2016, by and between Elliott Associates, L.P., Elliott International, L.P. and PulteGroup, Inc.

31	(a)	Rule 13a-14(a) Certification by Richard J. Dugas, Jr., Chairman and Chief Executive Officer (Filed herewith)

	(b)	Rule 13a-14(a) Certification by Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer (Filed herewith)

32		Certification Pursuant to 18 United States Code § 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934 (Filed herewith)

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101.SCH		XBRL Taxonomy Extension Schema Document




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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



PULTEGROUP, INC.



/s/ Robert T. O'Shaughnessy
Robert T. O'Shaughnessy
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
Date:	July 21, 2016

PulteGroup - 10-Q quarterly report FY2016 Q2

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