Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PULTEGROUP, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2012 and 2011

($000’s omitted, except per share data)

	2012				2011
ASSETS
Cash and equivalents	$	1,404,760			$	1,083,071
Restricted cash	71,950				101,860
House and land inventory	4,214,046				4,636,468
Land held for sale	91,104				135,307
Land, not owned, under option agreements	31,066				24,905
Residential mortgage loans available-for-sale	318,931				258,075
Investments in unconsolidated entities	45,629				35,988
Other assets	407,675				447,598
Intangible assets	149,248				162,348
	$	6,734,409			$	6,885,620
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Accounts payable, including book overdrafts of $42,053 and $48,380 in 2012 and 2011, respectively	$	178,274			$	196,447
Customer deposits	101,183				46,960
Accrued and other liabilities	1,418,063				1,411,941
Income tax liabilities	198,865				203,313
Financial Services debt	138,795				—
Senior notes	2,509,613				3,088,344
Total liabilities	4,544,793				4,947,005
Shareholders’ equity:
Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued	$	—			$	—
Common stock, $0.01 par value; 400,000,000 shares authorized, 386,608,436 and 382,607,543 shares issued and outstanding at December 31, 2012 and 2011, respectively	3,866				3,826
Additional paid-in capital	3,030,889				2,986,240
Accumulated other comprehensive loss	(992		)		(1,306		)
Accumulated deficit	(844,147		)		(1,050,145		)
Total shareholders’ equity	2,189,616				1,938,615
	$	6,734,409			$	6,885,620

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2012, 2011, and 2010

(000’s omitted, except per share data)

	2012				2011				2010
Revenues:
Homebuilding
Home sale revenues	$	4,552,412			$	3,950,743			$	4,419,812
Land sale revenues	106,698				82,853				27,815
	4,659,110				4,033,596				4,447,627
Financial Services	160,888				103,094				121,663
Total revenues	4,819,998				4,136,690				4,569,290
Homebuilding Cost of Revenues:
Home sale cost of revenues	3,833,451				3,444,398				4,006,385
Land sale cost of revenues	94,880				59,279				53,555
	3,928,331				3,503,677				4,059,940
Financial Services expenses	135,511				137,666				116,122
Selling, general and administrative expenses	514,457				519,583				895,102
Other expense (income), net	66,298				293,102				742,385
Interest income	(4,913		)		(5,055		)		(9,531		)
Interest expense	819				1,313				2,729
Equity in (earnings) loss of unconsolidated entities	(4,059		)		(3,296		)		(2,911		)
Income (loss) before income taxes	183,554				(310,300		)		(1,234,546		)
Income tax expense (benefit)	(22,591		)		(99,912		)		(137,817		)
Net income (loss)	$	206,145			$	(210,388	)		$	(1,096,729	)
Net income (loss) per share:
Basic	$	0.54			$	(0.55	)		$	(2.90	)
Diluted	$	0.54			$	(0.55	)		$	(2.90	)
Number of shares used in calculation:
Basic	381,562				379,877				378,585
Effect of dilutive securities	3,002				—				—
Diluted	384,564				379,877				378,585

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, 2012, 2011, and 2010

(000’s omitted, except per share data)

	2012				2011				2010
Net income (loss)	$	206,145			$	(210,388	)		$	(1,096,729	)
Other comprehensive income, net of tax:
Change in fair value of derivatives	314				213				724
Foreign currency translation adjustments	—				—				6
Other comprehensive income	314				213				730
Comprehensive income (loss)	$	206,459			$	(210,175	)		$	(1,095,999	)

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31, 2012, 2011, and 2010

(000’s omitted, except per share data)

	Common Stock							Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings (Accumulated Deficit)				Total
Shares			$
Shareholders' Equity, January 1, 2010	380,690			$	3,807			$	2,935,737			$	(2,249	)		$	257,145			$	3,194,440
Stock option exercises	902			9				8,659				—				—				8,668
Stock awards, net of cancellations	884			9				(9		)		—				—				—
Stock repurchases	(448	)		(5		)		(3,549		)		—				(469		)		(4,023		)
Stock-based compensation	—			—				32,081				—				—				32,081
Net income (loss)	—			—				—				—				(1,096,729		)		(1,096,729		)
Other comprehensive income	—			—				—				730				—				730
Shareholders' Equity, December 31, 2010	382,028			$	3,820			$	2,972,919			$	(1,519	)		$	(840,053	)		$	2,135,167
Stock awards, net of cancellations	944			10				(10		)		—				—				—
Stock repurchases	(364	)		(4		)		(3,128		)		—				296				(2,836		)
Stock-based compensation	—			—				16,459				—				—				16,459
Net income (loss)	—			—				—				—				(210,388		)		(210,388		)
Other comprehensive income	—			—				—				213				—				213
Shareholders' Equity, December 31, 2011	382,608			$	3,826			$	2,986,240			$	(1,306	)		$	(1,050,145	)		$	1,938,615
Stock option exercises	2,877			29				32,780				—				—				32,809
Stock awards, net of cancellations	1,228			12				(12		)		—				—				—
Stock repurchases	(105	)		(1		)		(813		)		—				(147		)		(961		)
Stock-based compensation	—			—				12,694				—				—				12,694
Net income (loss)	—			—				—				—				206,145				206,145
Other comprehensive income	—			—				—				314				—				314
Shareholders' Equity, December 31, 2012	386,608			$	3,866			$	3,030,889			$	(992	)		$	(844,147	)		$	2,189,616

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2012, 2011, and 2010

($000’s omitted)

	2012				2011				2010
Cash flows from operating activities:
Net income (loss)	$	206,145			$	(210,388	)		$	(1,096,729	)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
Write-down of land and deposits and pre-acquisition costs	17,195				35,786				214,444
Goodwill impairments	—				240,541				656,298
Depreciation and amortization	30,027				32,098				45,660
Stock-based compensation expense	22,897				16,970				32,081
Loss on debt retirements	32,071				5,638				38,920
Equity in (earnings) loss of unconsolidated entities	(4,059		)		(3,296		)		(2,911		)
Distributions of earnings from unconsolidated entities	7,488				7,083				5,512
Other non-cash, net	10,356				12,188				11,539
Increase (decrease) in cash due to:
Restricted cash	1,257				5,940				7,775
Inventories	455,223				54,891				(28,754		)
Residential mortgage loans available-for-sale	(60,828		)		(82,113		)		(7,991		)
Other assets	26,014				182,471				970,305
Accounts payable, accrued and other liabilities	20,802				(189,435		)		(187,512		)
Income tax liabilities	(4,448		)		(91,095		)		(66,513		)
Net cash provided by (used in) operating activities	760,140				17,279				592,124
Cash flows from investing activities:
Distributions from unconsolidated entities	3,029				4,531				4,231
Investments in unconsolidated entities	(16,456		)		(4,603		)		(22,890		)
Net change in loans held for investment	836				325				12,603
Change in restricted cash related to letters of credit	28,653				(83,199		)		—
Proceeds from the sale of property and equipment	7,586				10,555				1,780
Capital expenditures	(13,942		)		(21,238		)		(15,179		)
Net cash provided by (used in) investing activities	9,706				(93,629		)		(19,455		)
Cash flows from financing activities:
Financial Services borrowings (repayments)	138,795				—				(18,394		)
Other borrowings (repayments)	(618,800		)		(321,133		)		(935,917		)
Stock option exercises	32,809				—				8,668
Stock repurchases	(961		)		(2,836		)		(4,023		)
Net cash provided by (used in) financing activities	(448,157		)		(323,969		)		(949,666		)
Net increase (decrease) in cash and equivalents	321,689				(400,319		)		(376,997		)
Cash and equivalents at beginning of period	1,083,071				1,483,390				1,860,387
Cash and equivalents at end of period	$	1,404,760			$	1,083,071			$	1,483,390
Supplemental Cash Flow Information:
Interest paid (capitalized), net	$	(1,470	)		$	(9,623	)		$	18,367
Income taxes paid (refunded), net	$	(13,322	)		$	(62,167	)		$	(941,283	)

See Notes to Consolidated Financial Statements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of significant accounting policies

Basis of presentation

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

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of PulteGroup, Inc. and all of its direct and indirect subsidiaries and variable interest entities in which PulteGroup, Inc. is deemed to be the primary beneficiary. All significant intercompany accounts, transactions, and balances have been eliminated in consolidation.

Use of estimates

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

Reclassification

Certain prior period amounts have been reclassified to conform to the current year presentation.

Subsequent events

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

Cash and equivalents

Cash and equivalents include institutional money market investments and time deposits with a maturity of three months or less when acquired. Cash and equivalents at December 31, 2012 and 2011 also included $8.1 million and $13.0 million, respectively, of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit.

Restricted cash

We maintain certain cash balances that are restricted as to their use. Restricted cash consists primarily of deposits maintained with financial institutions under certain cash-collateralized letter of credit agreements (see Note 7). The remaining balances relate to certain other accounts with restrictions, including customer deposits on home sales that are temporarily restricted by regulatory requirements until title transfers to the homebuyer.

Investments in unconsolidated entities

We have investments in a number of unconsolidated entities, including joint ventures, with independent third parties. Some of these unconsolidated entities purchase, develop, and/or sell land and homes in the U.S. and Puerto Rico. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally this represents ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the profits and losses of these entities. Certain of these entities sell land to us. In these situations, we defer the recognition of profits from such activities until the time the related homes are sold. The cost method of accounting is used for investments in which we have less than a 20% ownership interest and do not have the ability to exercise significant influence.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We evaluate our investments in unconsolidated entities for recoverability in accordance with Accounting Standards Codification (“ASC”) 323, “Investments – Equity Method and Joint Ventures” (“ASC 323”). If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity in (earnings) loss of unconsolidated entities in the Consolidated Statements of Operations. Additionally, each unconsolidated entity evaluates its long-lived assets, such as inventory, for recoverability in accordance with ASC 360-10, “Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets” (“ASC 360-10”). Our proportionate share of any such impairments is also recorded to equity in (earnings) loss of unconsolidated entities in the Consolidated Statements of Operations. Evaluations of recoverability under both ASC 323 and ASC 360-10 are primarily based on projected cash flows. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates. See Note 6.

Notes receivable

In certain instances, we may accept consideration for land sales or other transactions in the form of a note receivable. We consider the creditworthiness of the counterparty when evaluating the relative risk and return involved in pursuing the applicable transaction. Due to the unique facts and circumstances surrounding each receivable, we assess the need for an allowance for each receivable on an individual basis. Factors considered as part of this assessment include the counterparty's payment history, the value of any underlying collateral, communications with the counterparty, knowledge of the counterparty's financial condition and plans, and the current and expected economic environment. Allowances are generally recorded in other expense (income), net when it becomes likely that some amount will not be collectible. Such receivables are reported net of allowance for credit losses within other assets. Notes receivable are written off when it is determined that collection efforts will no longer be pursued. Interest income is recognized as earned.

The following represents our notes receivable and related allowance for credit losses ($000’s omitted):

	December 31, 2012				December 31, 2011
Notes receivable, gross	$	57,841			$	78,834
Allowance for credit losses	(26,865		)		(41,647		)
Notes receivable, net	$	30,976			$	37,187

The decrease in the allowance for credit losses during 2012 relates primarily to settlement of a note receivable, for which an allowance had been recorded in previous periods, for an amount that approximated the note receivable's net book value. We also record other receivables from various parties in the normal course of business, including amounts due from municipalities, insurance companies, and vendors. Such receivables are generally non-interest bearing and non-collateralized, payable either on demand or upon the occurrence of a specified event, and are generally reported in other assets. See Residential mortgage loans available-for-sale in Note 1 for a discussion of our receivables related to mortgage operations.

Intangible assets

Intangible assets consist of trademarks and tradenames acquired in connection with the 2009 acquisition of Centex Corporation ("Centex") and the 2001 acquisition of Del Webb Corporation ("Del Webb"). These intangible assets were valued at the acquisition date and are being amortized over 20-year lives. The acquired cost and accumulated amortization of our intangible assets were $259.0 million and $109.8 million, respectively, at December 31, 2012, and $259.0 million and $96.7 million, respectively, at December 31, 2011. Amortization expense totaled $13.1 million in 2012, 2011, and 2010 and is expected to be $13.1 million in each of the next five years.

The ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use. If we determine that the carrying values of intangible assets may not be recoverable based upon the existence of one or more indicators of impairment, we use a projected undiscounted cash flow method to determine if impairment exists. If the carrying values of the intangible assets exceed the expected undiscounted cash flows, then we measure impairment as the difference between the fair value of the asset and the recorded carrying value. There were no impairments of intangible assets during 2012, 2011, or 2010.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Goodwill

Goodwill represents the cost of acquired companies in excess of the fair value of the net assets of such companies at the acquisition date. Recorded goodwill is allocated to our reporting units based on the relative fair value of each acquired reporting unit. We assess the goodwill balance of each reporting unit for impairment annually in the fourth quarter and when events or changes in circumstances indicate the carrying amount might not be recoverable. All goodwill was written-off as of December 31, 2011. See Note 2.

Property and equipment, net, and depreciation

Property and equipment are recorded at cost. Maintenance and repair costs are expensed as incurred. Depreciation is computed by the straight-line method based upon estimated useful lives as follows: vehicles, three to seven years, model and office furniture, two to three years, and equipment, three to ten years. Property and equipment are included in other assets and totaled $44.2 million net of accumulated depreciation of $190.1 million at December 31, 2012 and $53.2 million net of accumulated depreciation of $203.4 million at December 31, 2011. Depreciation expense totaled $16.9 million, $19.0 million, and $32.5 million in 2012, 2011, and 2010, respectively.

Advertising costs

Advertising costs are expensed as incurred and totaled $45.8 million, $55.1 million, and $54.9 million, in 2012, 2011, and 2010, respectively.

Employee benefits

We maintain defined contribution retirement plans that cover substantially all of our employees. Company contributions to these plans were suspended during 2010 and 2011, but were reinstated in 2012. Company contributions pursuant to the plans totaled $9.4 million in 2012.

Other expense (income), net

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

	2012				2011				2010
Write-offs of deposits and pre-acquisition costs (Note 4)	$	2,278			$	10,002			$	5,594
Loss on debt retirements (Note 7)	32,071				5,638				38,920
Lease exit and related costs (Note 3) (a)	7,306				9,900				28,378
Amortization of intangible assets (Note 1)	13,100				13,100				13,100
Goodwill impairments (Note 2)	—				240,541				656,298
Miscellaneous expense (income), net	11,543				13,921				95
	$	66,298			$	293,102			$	742,385

(a)	Excludes lease exit costs classified within Financial Services expenses of $0.5 million, $0.1 million, and $2.9 million in 2012, 2011, and 2010, respectively.

Earnings per share

Basic earnings per share is computed by dividing income (loss) available to common shareholders (the “numerator”) by the weighted-average number of common shares, adjusted for non-vested shares of restricted stock (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, non-vested restricted stock, 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. Earnings per share excludes 16.6 million out-of-the-money stock options and other potentially dilutive instruments in 2012. All stock options, non-vested restricted stock, and other potentially dilutive instruments were excluded from the calculation during 2011 and 2010 due to the net loss recorded during the periods.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. Although our outstanding restricted stock and restricted stock units are considered participating securities, there were no earnings attributable to restricted shareholders during 2012, 2011, or 2010.

Stock-based compensation

We measure compensation cost for stock options at fair value on the grant date and recognize compensation expense on the graded vesting method over the vesting period. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in greater expense in earlier years than the straight-line method. The fair value of our stock options is determined using primarily the Black-Scholes valuation model. The fair value of restricted stock is determined based on the quoted price of our common stock on the grant date. We recognize compensation expense for restricted stock grants, the majority of which cliff vest at the end of three years, ratably over the vesting period. For share-based awards containing performance conditions, we recognize compensation expense ratably over the vesting period when it is probable that the stated performance targets will be achieved and record cumulative adjustments in the period in which estimates change. Compensation expense related to our share-based awards is included in selling, general, and administrative expense, except for a small portion recognized in Financial Services expenses. See Note 9.

Income taxes

We follow the provisions of ASC 740, “Income Taxes” (“ASC 740”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Significant judgment is required to evaluate uncertain tax positions. Our evaluations of tax positions consider a variety of factors, including changes in facts or circumstances, changes in law, correspondence with taxing authorities, and effective settlements of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense (benefit) in the period in which the change is made. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense (benefit).

The provision for income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In determining the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the consolidated results of operations or financial position. See Note 10.

Homebuilding revenue recognition

Homebuilding revenue and related profit are generally recognized at the closing of the sale, when title to and possession of the property are transferred to the buyer. In situations where the buyer’s financing is originated by Pulte Mortgage and the buyer has not made an adequate initial or continuing investment, the profit on such sale is deferred until the sale of the related mortgage loan to a third-party investor has been completed, unless there is a loss on the sale in which case the loss on such sale is recognized at the time of closing. Such amounts were not material at either December 31, 2012 or December 31, 2011.

Sales incentives

When sales incentives involve a discount on the selling price of the home, we record the discount as a reduction of revenue at the time of house closing. If the sales incentive requires us to provide a free product or service to the customer, the cost of the free product or service is recorded as cost of revenues at the time of house closing. This includes the cost related to optional upgrades and seller-paid financing costs, closing costs, homeowners’ association fees, or merchandise.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Inventory

Inventory is stated at cost unless the carrying value is determined to not be recoverable, in which case the affected inventory is written down to fair value. Cost includes land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction. For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred. Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community. The specific identification method is used to accumulate home construction costs.

Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and commissions and closing costs applicable to the home. The construction cost of the home includes amounts paid through the closing date of the home, plus an appropriate accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Total community land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. The development cycles for our communities range from under one year to in excess of ten years for certain master planned communities. Adjustments to estimated total land acquisition and development costs for the community affect the amounts costed for the community’s remaining lots. See Note 4.

Land option agreements

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land takedowns, the availability and best use of necessary incremental capital, and other factors. We record these write-offs of deposits and pre-acquisition costs within other expense (income), net. See Note 4.

If the entity holding the land under option is a variable interest entity (“VIE”), our deposit represents a variable interest in that entity. If we are determined to be the primary beneficiary of the VIE, we are required to consolidate the VIE. Certain of our land option agreements are with entities considered VIEs. In evaluating whether we are required to consolidate a VIE, we take into consideration that the VIE is generally protected from the first dollar of loss under our land option agreement due to our deposit. Likewise, the VIE's gains are generally capped based on the purchase price within the land option agreement. However, we generally have little control or influence over the operations of these VIEs due to our lack of an equity interest in them. Additionally, creditors of the VIE have no recourse against us, and we do not provide financial or other support to these VIEs other than as stipulated in the land option agreements. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the applicable land option agreements. Historically, we have canceled a considerable number of land option agreements, which has resulted in write-offs of the related deposits and pre-acquisition costs but did not expose us to the overall risks or losses of the applicable VIEs. No VIEs required consolidation at either December 31, 2012 or December 31, 2011.

Separately, certain land option agreements represent financing arrangements even though we generally have no obligation to pay these future amounts. As a result, we recorded $31.1 million and $24.9 million at December 31, 2012 and December 31, 2011, respectively, to land, not owned, under option agreements with a corresponding increase to accrued and other liabilities. Such amounts represent the remaining purchase price under the land option agreements, some of which are with VIEs, in the event we exercise the purchase rights under the agreements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following provides a summary of our interests in land option agreements as of December 31, 2012 and December 31, 2011 ($000’s omitted):

	December 31, 2012												December 31, 2011
	Deposits and Pre-acquisition Costs				Remaining Purchase Price				Land, Not Owned, Under Option Agreements				Deposits and Pre-acquisition Costs				Remaining Purchase Price				Land, Not Owned, Under Option Agreements
Consolidated VIEs	$	5,216			$	8,590			$	8,590			$	2,781			$	5,957			$	3,837
Unconsolidated VIEs	24,078				360,495				—				21,180				240,958				—
Other land option agreements	40,822				554,307				22,476				33,086				451,079				21,068
	$	70,116			$	923,392			$	31,066			$	57,047			$	697,994			$	24,905

Land held for sale

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 held for sale is recorded at the lower of cost or fair value less costs to sell. See Note 4.

Start-up costs

Costs and expenses associated with opening new communities in existing markets are expensed when incurred.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time the product revenue is recognized.

Self-insured risks

We maintain, and require the majority of our subcontractors to maintain, general liability insurance coverage, including coverage for certain construction defects. We also maintain 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, subject to certain self-insured per occurrence and aggregate retentions, deductibles, and available policy limits. However, we retain a significant portion of the overall risk for such claims. We reserve for these costs on an undiscounted basis at the time product revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims, which include estimates of claims incurred but not yet reported. Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from its subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. See Note 13.

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. In accordance with ASC 825, “Financial Instruments” (“ASC 825”), we use the fair value option for residential mortgage loans available-for-sale. Election of the fair value option for these loans allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. We do not designate any derivative instruments as hedges or apply the hedge accounting provisions of ASC 815, “Derivatives and Hedging.” See Note 13 for discussion of the risks retained related to mortgage loan originations.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. At December 31, 2012 and 2011, residential mortgage loans available-for-sale had an aggregate fair value of $318.9 million and $258.1 million, respectively, and an aggregate outstanding principal balance of $305.3 million and $248.2 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(0.2) million and $(0.4) million for the years ended December 31, 2012 and 2011, respectively. These changes in fair value were substantially offset by changes in fair value of the corresponding hedging instruments. Net gains from the sale of mortgages during 2012, 2011, and 2010 were $109.2 million, $59.1 million, and $66.0 million, respectively, and have been included in Financial Services revenues.

Mortgage servicing rights

We 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 servicing rights for only a short period of time. We recognize the fair value of our rights to service a mortgage loan as revenue at the time of entering into an interest rate lock commitment with a borrower. Due to the short period of time the servicing rights are held, we do not amortize the servicing asset. The servicing sales contracts provide for the reimbursement of payments made by the purchaser if loans prepay within specified periods of time, generally within 90 to 120 days after sale. We establish reserves for this liability at the time the sale is recorded. Such reserves were immaterial at December 31, 2012 and 2011 and are included in accrued and other liabilities.

Loans held for investment

We originate interim financing mortgage loans for certain customers and also have a portfolio of loans that either have been repurchased from investors or were not saleable upon closing. These loans are carried at cost and are reviewed for impairment when recoverability becomes doubtful. Loans held for investment are included in other assets and totaled $1.3 million and $2.4 million (net of reserves of $1.4 million and $1.9 million) at December 31, 2012 and 2011, respectively.

Interest income on mortgage loans

Interest income on mortgage loans is recorded in Financial Services revenues, accrued from the date a mortgage loan is originated until the loan is sold, and totaled $6.0 million, $5.0 million, and $5.8 million in 2012, 2011, and 2010, respectively. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan. Mortgage discounts are not amortized as interest income due to the short period the loans are held until sale to third party investors.

Mortgage servicing, origination, and commitment fees

Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned. Loan origination costs related to residential mortgage loans available-for-sale are recognized as incurred in Financial Services expenses while the associated mortgage origination fees are recognized in Financial Services revenues as earned, generally upon loan closing.

Title services

Revenues associated with our title operations are recognized within Financial Services revenues as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Derivative instruments and hedging activities

We are exposed to market risks from commitments to lend, movements in interest rates, and canceled or modified commitments to lend. A commitment to lend at a specific interest rate (an interest rate lock commitment) is a derivative financial instrument (interest rate is locked to the borrower). In order to reduce these risks, we use other derivative financial instruments, principally cash forward placement contracts on mortgage-backed securities and whole loan investor commitments, to economically hedge the interest rate lock commitment. We enter into these derivative financial instruments based upon our portfolio of interest rate lock commitments and closed loans. We do not use any derivative financial instruments for trading purposes.

At December 31, 2012 and 2011, we had interest rate lock commitments in the total amount of $161.6 million and $97.6 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. We evaluate the creditworthiness of these transactions through our normal credit policies.

Forward contracts on mortgage-backed securities are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price and may be settled in cash, by offsetting the position, or through the delivery of the financial instrument. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments we use to minimize market risk during the period from the time we extend an interest rate lock to a loan applicant until the time the loan is sold to an investor. We also use whole loan investor commitments, which are obligations of the investor to buy loans from us at a specified price within a specified time period. At December 31, 2012 and 2011, we had unexpired forward contracts of $428.0 million and $311.5 million, respectively, and whole loan investor commitments of $4.7 million and $1.6 million, respectively. Changes in the fair value of interest rate lock commitments and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable.

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on interest rate lock commitments are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 60 days.

The fair values of derivative instruments and their locations in the Consolidated Balance Sheets are summarized below ($000’s omitted):

	December 31, 2012								December 31, 2011
	Other Assets				Other Liabilities				Other Assets				Other Liabilities
Interest rate lock commitments	$	6,045			$	24			$	3,552			$	1
Forward contracts	245				891				44				3,514
Whole loan commitments	30				85				52				41
	$	6,320			$	1,000			$	3,648			$	3,556

New accounting pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement” (“ASU 2011-04”), which amended Accounting Standards Codification (ASC) 820 to clarify existing guidance and minimize differences between U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide additional disclosures for classes of assets and liabilities disclosed at fair value. We adopted ASU 2011-04 as of January 1, 2012, which did not have a material impact on our financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Statement of Comprehensive Income” (“ASU 2011-05”), which requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 was effective for our fiscal year beginning January 1, 2012. The standard did not impact our reported results of operations but did impact our financial statement presentation. We now present items of other

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

comprehensive income in the Statement of Consolidated Comprehensive Income rather than in the Statement of Shareholders' Equity.

In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"), which requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. The guidance is effective for our fiscal year beginning January 1, 2013 and is to be applied retrospectively. The adoption of this guidance, which is related to disclosure only, is not expected to have a material impact on our financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles - Goodwill and Other,” which provides the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not an indefinite-lived intangible asset is impaired. If the asset is considered impaired, an entity is required to perform the quantitative assessment under the existing guidance. The guidance is effective for our fiscal year beginning January 1, 2013. The adoption of this guidance, which is intended to simplify the impairment testing, is not expected to have a material impact on our financial statements.

2. Goodwill

Goodwill was recorded in connection with various acquisitions but was written-off as of December 31, 2011. We evaluated the recoverability of goodwill by comparing the carrying value of our reporting units to their fair value. Fair value was determined using discounted cash flows supplemented by market-based assessments of fair value, and impairment was measured as the difference between the resulting implied fair value of goodwill and its recorded carrying value. The determination of fair value was significantly impacted by estimates related to current market valuations, current and future economic conditions in each of our geographical markets, and our strategic plans within each of our markets.

In the third quarters of both 2011 and 2010, we performed event-driven assessments of the recoverability of goodwill. These assessments were necessary primarily due to sustained declines in our market capitalization. In performing the goodwill impairment analyses, we followed similar approaches using management's estimates of the future cash flows for each reporting unit, which were required to consider the decrease in our market capitalization. The results of these analyses determined that goodwill impairment charges of $240.5 million and $654.9 million in the third quarters of 2011 and 2010, respectively, were required. In the second quarter of 2010, we also recorded a goodwill impairment charge of $1.4 million in conjunction with the completion of business combination accounting for the Centex merger and disposed of $1.6 million of goodwill in connection with the sale of the retail title operations acquired with the Centex merger.

Activity in our goodwill balances by reporting segment consisted of the following ($000's omitted):

	Reporting Segment
	Northeast				Southeast				Florida				Texas				North				Southwest				Financial Services				Total Goodwill
December 31, 2009	—				327,033				5,465				347,969				160,095				53,763				1,593				895,918
Additions	494				610				79				600				468				263				—				2,514
Impairments	(494		)		(267,149		)		(5,544		)		(256,474		)		(95,207		)		(31,430		)		—				(656,298		)
Disposals	—				—				—				—				—				—				(1,593		)		(1,593		)
December 31, 2010	—				60,494				—				92,095				65,356				22,596				—				240,541
Impairments	—				(60,494		)		—				(92,095		)		(65,356		)		(22,596		)		—				(240,541		)
December 31, 2011	$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—

Our accumulated goodwill impairment losses totaled $1.8 billion at December 31, 2012. This includes goodwill and impairments associated with the Centex merger as well as goodwill and impairments associated with previous acquisitions. The goodwill associated with such previous acquisitions was fully impaired as of December 31, 2009. Goodwill impairment charges are reflected in other expense (income), net.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. Restructuring

We periodically take actions to reduce ongoing operating costs and improve operating efficiencies. As a result of these actions, we incurred total restructuring charges as summarized below ($000’s omitted):

	Total Restructuring Actions
	2012				2011				2010
Employee severance benefits	$	4,481			$	10,841			$	24,850
Lease exit costs	5,702				5,923				27,356
Other	2,057				4,089				3,929
	$	12,240			$	20,853			$	56,135

Of the total restructuring costs reflected in the above table, $0.5 million in 2012, $1.2 million in 2011, and $5.4 million in 2010 are classified within Financial Services expenses. All other employee severance benefits are included within selling, general and administrative expense while lease exit and other costs are included in other expense (income), net. The remaining liability for employee severance benefits and exited leases totaled $1.0 million and $23.0 million, respectively, at December 31, 2012 and $2.6 million and $29.7 million, respectively, at December 31, 2011. Substantially all of the remaining liability for employee severance benefits will be paid within the next year, while cash expenditures related to the remaining liability for lease exit costs will be incurred over the remaining terms of the applicable office leases, which generally extend several years. The restructuring costs relate to various reportable segments and did not materially impact the comparability of any one segment.

4. Inventory and land held for sale

Major components of inventory at December 31, 2012 and 2011 were ($000’s omitted):

	2012				2011
Homes under construction	$	1,116,184			$	1,210,717
Land under development	2,435,378				2,610,501
Raw land	662,484				815,250
	$	4,214,046			$	4,636,468

We capitalize interest cost into inventory during the active development and construction of our communities. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is recorded based on the cyclical timing of home closings. During 2012 and 2011, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. During 2010, we capitalized all Homebuilding interest costs into inventory except $1.5 million that was expensed directly to interest expense due to our debt levels exceeding our active inventory levels for a portion of the year.

Information related to interest capitalized into inventory is as follows ($000’s omitted):

	Years Ended December 31,
	2012				2011				2010
Interest in inventory, beginning of period	$	355,068			$	323,379			$	239,365
Interest capitalized	201,103				221,071				264,932
Interest expensed (a)	(224,291		)		(189,382		)		(180,918		)
Interest in inventory, end of period	$	331,880			$	355,068			$	323,379
Interest incurred (b)	$	201,103			$	221,071			$	266,474

(a)	Interest expensed to Homebuilding cost of revenues for 2012, 2011, and 2010 included $6.5 million, $5.4 million, and $27.6 million, respectively, of capitalized interest related to inventory impairments.

(b)	Homebuilding interest incurred includes interest on senior debt and certain other financing arrangements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Land valuation adjustments and write-offs

Impairment of inventory

We record valuation adjustments on land inventory and related communities under development when events and circumstances indicate that they may be impaired and when the cash flows estimated to be generated by those assets are less than their carrying amounts. Such indicators include gross margin or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. For communities that are not yet active, an additional consideration includes an evaluation of the probability, timing, and cost of obtaining necessary approvals from local municipalities and any potential concessions that may be necessary in order to obtain such approvals. We also consider potential changes to the product offerings in a community and any alternative strategies for the land, such as the sale of the land either in whole or in parcels. Communities that demonstrate potential impairment indicators are tested for impairment. We compare the expected undiscounted cash flows for these communities to their carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we estimate the fair value of the community. Impairment charges are required to be recorded if the fair value of the community's inventory is less than its carrying value.

We determine the fair value of a community's inventory using a combination of market comparable land transactions, where available, and discounted cash flow models. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the discounted cash flow models are specific to each community tested for impairment. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, and the long life cycles of many communities, actual results could differ significantly from such estimates. Our determination of fair value also requires discounting the estimated cash flows at a rate commensurate with the inherent risks associated with each of the assets and related estimated cash flow streams. The discount rate used in determining each community's fair value depends on the stage of development of the community and other specific factors that increase or decrease the inherent risks associated with the community's cash flow streams. For example, communities that are entitled and near completion will generally be assigned a lower discount rate than communities that are not entitled and consist of multiple phases spanning several years of development and construction activity.

In 2012, we reviewed each of our land positions for potential impairment indicators and performed detailed impairment calculations for 35 communities. As discussed above, determining the fair value of a community's inventory involves a number of variables, many of which are interrelated. The table below summarizes certain quantitative unobservable inputs utilized in determining the fair value of impaired communities during 2012:

Unobservable input	Range
Average selling price ($000s)	$139	-	$626
Sales pace per quarter (units)	1	-	9
Discount rate	12%	-	16%

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The table below provides, as of the date indicated, the number of communities for which we recognized impairment charges, the fair value of those communities at such date (net of impairment charges), and the amount of impairment charges recognized ($000’s omitted):

	2012											2011
Quarter Ended	Number of Communities Impaired			Fair Value of Communities Impaired, Net of Impairment Charges				Impairment Charges				Number of Communities Impaired			Fair Value of Communities Impaired, Net of Impairment Charges				Impairment Charges
March 31	4			$	7,468			$	4,514			1			$	483			$	103
June 30	4			16,311				2,796				6			6,665				3,300
September 30	4			6,172				2,263				3			6,416				1,494
December 31	5			11,243				3,864				25			23,766				11,043
								$	13,437										$	15,940

We recorded these valuation adjustments within Homebuilding home sale cost of revenues.

Our evaluations for impairments were based on our best estimates of the future cash flows for our communities. However, if conditions in the homebuilding industry or our local markets worsen in the future or if our strategy related to certain communities changes, we may be required to evaluate our assets for future impairments or write-downs, which could result in future charges that might be significant.

Net realizable value adjustments – land held for sale

Land held for sale is valued at the lower of carrying value or fair value less costs to sell. In determining the fair value of land held for sale, we consider recent offers received, prices for land in recent comparable sales transactions, and other factors. During 2012, 2011, and 2010, we recognized net realizable value adjustments related to land held for sale of $1.5 million, $9.8 million, and $39.1 million, respectively. We record these net realizable value adjustments within Homebuilding land sale cost of revenues. Land held for sale at December 31, 2012 and 2011 was as follows ($000’s omitted):

	2012				2011
Land held for sale, gross	$	135,201			$	190,099
Net realizable value reserves	(44,097		)		(54,792		)
Land held for sale, net	$	91,104			$	135,307

Write-off of deposits and pre-acquisition costs

We wrote off (net of recoveries) deposits and pre-acquisition costs in the amount of $2.3 million, $10.0 million, and $5.6 million, during 2012, 2011, and 2010, respectively. We record these write-offs of deposits and pre-acquisition costs within other expense (income), net.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. 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. Home sale revenues for detached and attached homes were $3.6 billion and $925.4 million in 2012, $3.1 billion and $841.3 million in 2011, and $3.5 billion and $936.6 million in 2010, respectively. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:

Northeast:		Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia
Southeast:		Georgia, North Carolina, South Carolina, Tennessee
Florida:		Florida
Texas:		Texas
North:		Illinois, Indiana, Michigan, Minnesota, Missouri, Northern California, Ohio, Oregon, Washington
Southwest:		Arizona, Colorado, Nevada, New Mexico, Southern California

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

Evaluation of segment performance is generally based on income before income taxes. Each reportable segment generally follows the same accounting policies described in Note 1 "Summary of Significant Accounting Policies" to the consolidated financial statements.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000’s omitted) Years Ended December 31,
	2012				2011				2010
Revenues:
Northeast	$	755,148			$	717,839			$	760,403
Southeast	691,113				675,904				752,702
Florida	628,997				571,102				547,647
Texas	682,929				631,419				643,365
North	1,022,633				740,372				863,512
Southwest	878,290				696,960				879,998
	4,659,110				4,033,596				4,447,627
Financial Services	160,888				103,094				121,663
Consolidated revenues	$	4,819,998			$	4,136,690			$	4,569,290
Income (loss) before income taxes:
Northeast	$	73,345			$	29,320			$	34,619
Southeast	64,678				45,060				23,454
Florida	73,472				44,946				(51,995		)
Texas	60,979				33,329				16,026
North	84,597				(12,376		)		571
Southwest	79,887				36,647				(64,140		)
Other homebuilding (a)	(278,967		)		(452,756		)		(1,198,690		)
	157,991				(275,830		)		(1,240,155		)
Financial Services (b)	25,563				(34,470		)		5,609
Consolidated income (loss) before income taxes	$	183,554			$	(310,300	)		$	(1,234,546	)

(a)	Other homebuilding includes the amortization of intangible assets, goodwill impairment, amortization of capitalized interest, loss on debt retirements and other costs not allocated to the operating segments.

(b)	Financial Services income (loss) before income taxes includes interest expense of $0.5 million, $0.0 million, and $1.6 million for 2012, 2011, and 2010, respectively, and interest income of $6.0 million, $5.0 million, and $5.8 million for 2012, 2011, and 2010, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Land-Related Charges by Segment ($000's omitted) Years Ended December 31,
	2012				2011				2010
Land and community valuation adjustments:
Northeast	$	798			$	534			$	4,907
Southeast	389				902				11,122
Florida	—				—				56,445
Texas	—				260				4,589
North	3,972				8,802				27,732
Southwest	1,810				—				36,797
Other homebuilding (a)	6,468				5,442				28,130
	$	13,437			$	15,940			$	169,722
Net realizable value adjustments (NRV) - land held for sale:
Northeast	$	—			$	720			$	—
Southeast	350				446				—
Florida	49				3,692				366
Texas	423				153				1,484
North	311				3,552				197
Southwest	347				1,281				37,081
	$	1,480			$	9,844			$	39,128
Write-off of deposits and pre-acquisition costs (b):
Northeast	$	996			$	3,704			$	(672	)
Southeast	624				1,081				3,019
Florida	165				307				22
Texas	133				415				741
North	263				2,513				147
Southwest	97				1,982				2,337
	$	2,278			$	10,002			$	5,594
Impairments of investments in unconsolidated joint ventures:
Southwest	—				—				1,908
	$	—			$	—			$	1,908
Total land-related charges	$	17,195			$	35,786			$	216,352

(a)	Primarily write-offs of capitalized interest related to land and community valuation adjustments.

(b)	Includes settlements related to costs previously in dispute and considered non-recoverable.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2012				2011				2010
Depreciation and amortization:
Northeast	$	1,790			$	1,820			$	1,954
Southeast	1,028				1,414				2,904
Florida	1,640				2,045				2,031
Texas	1,619				2,002				2,027
North	1,709				1,614				1,883
Southwest	3,143				3,076				5,075
Other homebuilding (a)	16,168				17,329				25,817
	27,097				29,300				41,691
Financial Services	2,930				2,798				3,969
	$	30,027			$	32,098			$	45,660

(a)	Other homebuilding includes amortization of intangible assets.

	Operating Data by Segment ($000's omitted) Years Ended December 31,
	2012				2011				2010
Equity in (earnings) loss of unconsolidated entities (a):
Northeast	$	(4	)		$	15			$	(209	)
Southeast	—				—				—
Florida	—				—				(1,326		)
Texas	—				—				—
North	(1,497		)		(121		)		(1,580		)
Southwest	(1,137		)		(2,561		)		197
Other homebuilding	(1,235		)		(527		)		75
	(3,873		)		(3,194		)		(2,843		)
Financial Services	(186		)		(102		)		(68		)
	$	(4,059	)		$	(3,296	)		$	(2,911	)

(a)	Includes impairments related to investments in unconsolidated joint ventures.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Operating Data by Segment
	($000's omitted)
	December 31, 2012
	Homes Under Construction				Land Under Development				Raw Land				Total Inventory				Total Assets
Northeast	$	198,549			$	445,436			$	109,136			$	753,121			$	866,024
Southeast	147,227				286,210				120,193				553,630				590,650
Florida	130,276				310,625				100,633				541,534				620,220
Texas	145,594				256,704				54,556				456,854				523,843
North	219,172				369,144				46,414				634,730				680,447
Southwest	226,204				496,488				167,295				889,987				963,540
Other homebuilding (a)	49,162				270,771				64,257				384,190				2,140,739
	1,116,184				2,435,378				662,484				4,214,046				6,385,463
Financial Services	—				—				—				—				348,946
	$	1,116,184			$	2,435,378			$	662,484			$	4,214,046			$	6,734,409
	December 31, 2011
	Homes Under Construction				Land Under Development				Raw Land				Total Inventory				Total Assets
Northeast	$	237,722			$	457,010			$	119,549			$	814,281			$	957,844
Southeast	166,302				315,208				123,209				604,719				626,506
Florida	137,900				321,841				110,040				569,781				637,418
Texas	136,325				294,814				77,125				508,264				568,974
North	268,011				360,202				91,260				719,473				803,174
Southwest	216,067				577,656				216,554				1,010,277				1,099,058
Other homebuilding (a)	48,390				283,770				77,513				409,673				1,904,847
	1,210,717				2,610,501				815,250				4,636,468				6,597,821
Financial Services	—				—				—				—				287,799
	$	1,210,717			$	2,610,501			$	815,250			$	4,636,468			$	6,885,620
	December 31, 2010
	Homes Under Construction				Land Under Development				Raw Land				Total Inventory				Total Assets
Northeast	$	236,298			$	460,789			$	129,733			$	826,820			$	993,918
Southeast	219,339				301,989				132,920				654,248				688,524
Florida	161,461				256,238				153,814				571,513				701,910
Texas	152,274				299,146				86,137				537,557				592,827
North	271,501				333,958				112,629				718,088				780,367
Southwest	246,926				629,302				216,478				1,092,706				1,186,618
Other homebuilding (a)	43,819				260,407				76,655				380,881				2,532,223
	1,331,618				2,541,829				908,366				4,781,813				7,476,387
Financial Services	—				—				—				—				222,989
	$	1,331,618			$	2,541,829			$	908,366			$	4,781,813			$	7,699,376

(a)	Other homebuilding primarily includes capitalized interest, cash and equivalents, goodwill, income taxes receivable, intangibles, and other corporate items that are not allocated to the operating segments.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Investments in unconsolidated entities

We participate in a number of joint ventures with independent third parties. Many of these joint ventures purchase, develop, and/or sell land and homes in the U.S. and Puerto Rico. A summary of our joint ventures is presented below ($000’s omitted):

	December 31,
	2012				2011
Investments in joint ventures with debt non-recourse to PulteGroup	11,155				11,453
Investments in other active joint ventures	34,474				24,535
Total investments in unconsolidated entities	$	45,629			$	35,988
Total joint venture debt	$	6,915			$	11,107
PulteGroup proportionate share of joint venture debt:
Joint venture debt with limited recourse guaranties	$	769			$	1,202
Joint venture debt non-recourse to PulteGroup	826				2,009
PulteGroup's total proportionate share of joint venture debt	$	1,595			$	3,211

In 2012, 2011, and 2010, we recognized (income) expense from unconsolidated joint ventures of $(4.1) million, $(3.3) million, and $(2.9) million, respectively. The income recognized during 2010 includes impairments totaling $1.9 million. During 2012, 2011, and 2010, we made capital contributions of $16.5 million, $4.6 million, and $22.9 million, respectively, and received capital and earnings distributions of $10.5 million, $11.6 million, and $9.7 million, respectively.

The timing of cash obligations under the joint venture and any related financing agreements varies by agreement. If additional capital contributions are required and approved, we would need to contribute our pro rata portion of those capital needs in order to not dilute our ownership in the joint ventures. While future capital contributions may be required, we believe the total amount of such contributions will be limited. Our maximum financial loss exposure related to joint ventures is unlikely to exceed the combined investment and limited recourse guaranty totals.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Debt

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

	December 31,
	2012				2011
5.45% unsecured senior notes due August 2012 (a)	—				96,795
6.25% unsecured senior notes due February 2013 (a)	—				62,677
5.125% unsecured senior notes due October 2013 (a)	—				117,197
5.25% unsecured senior notes due January 2014 (a)	187,970				255,882
5.70% unsecured senior notes due May 2014 (a)	208,274				311,900
5.20% unsecured senior notes due February 2015 (a)	95,615				207,906
5.25% unsecured senior notes due June 2015 (a)	264,058				270,551
6.50% unsecured senior notes due May 2016 (a)	457,154				469,147
7.625% unsecured senior notes due October 2017 (b)	149,481				149,373
7.875% unsecured senior notes due June 2032 (a)	299,152				299,108
6.375% unsecured senior notes due May 2033 (a)	398,492				398,418
6.00% unsecured senior notes due February 2035 (a)	299,417				299,390
7.375% unsecured senior notes due June 2046 (a)	150,000				150,000
Total senior notes – carrying value (c)	$	2,509,613			$	3,088,344
Estimated fair value	$	2,663,451			$	2,765,151

(a)	Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.

(b)	Not redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.

(c)	The recorded carrying value reflects the impact of various discounts and premiums that are amortized to interest cost over the respective terms of the senior notes.

Refer to Note 14 for supplemental consolidating financial information of the Company.

The indentures governing the senior notes impose certain restrictions on the incurrence of additional debt along with other limitations. At December 31, 2012, we were in compliance with all of the covenants and requirements under the senior notes.

Total senior note principal maturities of $2.5 billion during the five years after 2012 are as follows: 2013 - $0.0 million; 2014 - $398.9 million; 2015 - $369.2 million; 2016 - $465.2 million; 2017 - $150.0 million; and thereafter - $1.2 billion.

Debt retirement

During the last three years, we significantly reduced our outstanding senior notes through a variety of transactions, including scheduled maturities, open market repurchases, early redemptions as provided within indenture agreements, and tender offers. As a result of these transactions, we reduced our outstanding senior notes by $592.4 million, $323.9 million, and $898.5 million during 2012, 2011, and 2010, respectively, and recorded losses totaling $32.1 million, $5.6 million, and $38.9 million in 2012, 2011 and 2010, respectively. Losses on these transactions include the write-off of unamortized discounts, premiums, and transaction fees and are reflected in other expense (income), net.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Letter of credit facilities

We maintain separate cash-collateralized letter of credit agreements with a number of financial institutions. Letters of credit totaling $54.5 million and $83.2 million were outstanding under these agreements at December 31, 2012 and 2011, respectively. Under these agreements, we are required to maintain deposits with the respective financial institutions in amounts approximating the letters of credit outstanding. Such deposits are included in restricted cash.

We also maintain an unsecured letter of credit facility with a bank that expires in September 2014. This facility originally permitted the issuance of up to $200.0 million of letters of credit for general corporate purposes in support of any wholly-owned subsidiary. We voluntarily reduced the capacity of this facility to $150.0 million effective July 2, 2012. At December 31, 2012 and 2011, $124.6 million and $152.7 million, respectively, of letters of credit were outstanding under this facility.

Financial Services

Pulte Mortgage provides mortgage financing for the majority of our home closings utilizing its own funds and funds made available pursuant to credit agreements with third party lenders or through intercompany borrowings. Pulte Mortgage uses these resources to finance its lending activities until the mortgage loans are sold to third party investors, generally within 30 days.

In September 2012, Pulte Mortgage entered into a Master Repurchase Agreement (the “Repurchase Agreement”) with third party lenders. The Repurchase Agreement provides for borrowings up to $150.0 million, subject to certain sublimits, and expires in September 2013. 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. At December 31, 2012, Pulte Mortgage had $138.8 million outstanding and was in compliance with all of the covenants and requirements under the Repurchase Agreement. During 2010 and 2011, Pulte Mortgage funded its operations using internal Company resources after allowing the majority of its third party credit arrangements to expire during 2010.

The following is aggregate borrowing information for our mortgage operations as of each year-end ($000’s omitted):

	December 31,
	2012				2011				2010
Available credit lines	$	150,000			$	2,500			$	2,500
Unused credit lines	$	11,205			$	2,500			$	2,500
Weighted-average interest rate	3.00		%		4.50		%		4.50		%

8. Shareholders’ equity

Pursuant to $100.0 million stock repurchase programs authorized by the Board of Directors in October 2002 and October 2005, and a $200.0 million stock repurchase authorization in February 2006 (for a total stock repurchase authorization of $400.0 million), we have repurchased a total of 9,688,900 shares for a total of $297.7 million, though there were no repurchases under these programs during 2012, 2011, or 2010. At December 31, 2012, we had remaining authorization to purchase $102.3 million of common stock.

Under our stock-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of restricted stock, generally related to the payment of minimum tax obligations. During 2012, 2011, and 2010, we repurchased $1.0 million, $2.8 million, and $4.0 million, respectively, of shares from employees under these plans. Such repurchases are excluded from the $400.0 million stock repurchase authorization.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. Stock compensation plans

We maintain a stock award plan for both employees and for non-employee directors. Information related to the active plan as of December 31, 2012 is as follows:

Plan Name	Shares Authorized			Shares Available for Grant
PulteGroup, Inc. 2004 Stock Incentive Plan	22,000,000			6,725,123

The plan provides for the grant of a variety of equity awards, including options (generally non-qualified options), restricted stock, performance shares, and restricted stock units ("RSUs") to key employees (as determined by the Compensation Committee of the Board of Directors) for periods not exceeding ten years. Options granted to employees generally vest incrementally over four years. Restricted stock generally cliff vests after three years. Performance shares vest upon attainment of the stated performance targets and minimum service requirements and are converted into shares of common stock upon distribution. RSUs represent the right to receive an equal number of shares of common stock and are converted into shares of common stock upon distribution.

Non-employee directors are entitled to an annual distribution of stock options, common stock, or restricted stock units. All options and RSUs granted to non-employee directors vest immediately and are exercisable on the grant date for ten years.

Our stock compensation expense for the three years ended December 31, 2012 is presented below ($000's omitted):

	2012				2011				2010
Stock options	$	2,617			$	5,228			$	15,030
Restricted stock	8,919				11,231				17,051
Performance shares and RSUs	1,158				—				—
Long-term incentive plans	10,203				511				—
	$	22,897			16,970				32,081

Stock options

A summary of stock option activity for the three years ended December 31, 2012 is presented below (000’s omitted except per share data):

	2012								2011								2010
	Shares				Weighted- Average Per Share Exercise Price				Shares				Weighted- Average Per Share Exercise Price				Shares				Weighted- Average Per Share Exercise Price
Outstanding, beginning of year	21,641				$	21			24,004				$	21			26,193				$	21
Granted	—				$	—			441				$	8			1,128				$	11
Exercised	(2,877		)		$	11			—				$	—			(902		)		$	10
Forfeited	(1,616		)		$	27			(2,804		)		$	15			(2,415		)		$	21
Outstanding, end of year	17,148				$	22			21,641				$	21			24,004				$	21
Options exercisable at year end	15,719				$	23			18,845				$	23			19,400				$	23
Weighted-average per share fair value of options granted during the year	$	—							$	4.46							$	6.43

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes information about the weighted-average remaining contractual lives of stock options outstanding and exercisable at December 31, 2012:

	Options Outstanding									Options Exercisable
	Number Outstanding (000's omitted)			Weighted- Average Remaining Contract Life (in years)		Weighted- Average Per Share Exercise Price				Number Exercisable (000's omitted)			Weighted- Average Per Share Exercise Price
$0.01 to $11.00	2,504			5.5		$	10			2,063			$	11
$11.01 to $18.00	4,989			6.4		$	12			4,001			$	12
$18.01 to $25.00	3,271			1.1		$	22			3,271			$	22
$25.01 to $35.00	3,894			3.0		$	31			3,894			$	31
$35.01 to $60.00	2,490			2.5		$	42			2,490			$	42
	17,148			3.9		$	22			15,719			$	23

The fair value of each option grant is estimated on the date of grant using primarily the Black-Scholes option pricing model with the following weighted-average assumptions:

	Weighted-Average Assumptions Year Ended December 31,
	2012		2011			2010
Expected life of options in years	N/A		6.2			6.0
Expected stock price volatility	N/A		58	%		58	%
Expected dividend yield	N/A		0.0	%		0.0	%
Risk-free interest rate	N/A		2.7	%		2.7	%

We estimate the expected life of stock options using employees’ historical exercise behavior and the contractual terms of the instruments. Volatility is estimated using historical volatility with consideration for implied volatility.

Total compensation cost related to non-vested stock option awards not yet recognized was $1.4 million at December 31, 2012. These costs will be expensed over a weighted-average vesting period of approximately one year. The stock option participant agreements provide continued vesting for certain eligible employees who have achieved a predetermined level of service based on their combined age and years of service. We record the related compensation cost for these awards over the period through the date the employee first achieves the minimum level of service that would no longer require them to provide services to earn the award, which is reflected in the weighted-average vesting period.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The aggregate intrinsic value of stock options that were exercised during 2012, 2011, and 2010 was $8.6 million, $0.0 million, and $1.8 million, respectively. As of December 31, 2012, options outstanding had an intrinsic value of $50.4 million, of which $39.6 million related to options exercisable.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Restricted stock

A summary of restricted stock activity for the three years ended December 31, 2012 is presented below (000’s omitted, except per share data):

	2012							2011							2010
	Shares			Weighted- Average Per Share Grant Date Fair Value				Shares			Weighted- Average Per Share Grant Date Fair Value				Shares			Weighted- Average Per Share Grant Date Fair Value
Non-vested at beginning of year	2,322			$	10			2,775			$	12			3,539			$	16
Granted	1,154			$	9			1,032			$	8			1,552			$	11
Vested	(333	)		$	11			(1,242	)		$	13			(1,541	)		$	21
Forfeited	(137	)		$	10			(243	)		$	11			(775	)		$	12
Non-vested at end of year	3,006			$	9			2,322			$	10			2,775			$	12

During 2012, 2011, and 2010, the total fair value of shares vested during the year was $3.7 million, $15.9 million, and $32.2 million, respectively. Unamortized compensation cost related to restricted stock awards was $8.7 million at December 31, 2012. These costs will be expensed over a weighted-average period of approximately 2 years.

Performance shares and RSUs

A summary of performance share activity for the three years ended December 31, 2012 is presented below (000’s omitted, except per share data):

	2012							2011							2010
	Shares			Weighted- Average Grant Date Fair Value				Shares			Weighted- Average Grant Date Fair Value				Shares			Weighted- Average Grant Date Fair Value
Outstanding, beginning of year	720			$	7			140			$	12			123			$	12
Granted	308			$	13			772			$	7			133			$	12
Forfeited	—			$	—			—			$	—			—			$	—
Distributed	(211	)		$	10			(192	)		$	9			(116	)		$	12
Outstanding, end of year	817			$	8			720			$	7			140			$	12
Vested, end of year	51			$	10			120			$	11			140			$	12

During 2012 and 2011, we granted performance shares to certain individuals. We recognized expense in 2012 when it became probable that certain of the stated performance targets would be achieved. The fair value of each performance share was calculated using the stock price on the grant date. Unamortized compensation cost related to performance shares considered probable was $1.6 million at December 31, 2012 and will be expensed over a weighted-average period of approximately one year. Additionally, there were 51,453 RSUs outstanding that had vested but had not yet been paid out because the payout date had been deferred by the holder.

Long-term incentive plans

In lieu of restricted stock grants, we maintain a long-term incentive plan for certain of our field employees that provides awards based on the achievement of stated performance targets over a three-year period. Awards are earned each year in the form of share units that are paid out in cash at the end of the performance period based upon the number of share units earned times the Company's stock price at the end of the performance period. Accordingly, the liability associated with the awards is adjusted each reporting period based on movements in the Company's stock price and totaled $5.9 million and $0.5 million at December 31, 2012 and 2011, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During 2012, we implemented a long-term performance award plan for senior management that provides awards based on the achievement of stated performance targets over a three-year period. Awards are earned based on our cumulative performance over the performance period and are stated in dollars but settled in common shares based on the Company's stock price at the end of the performance period. If the Company's stock price falls below a floor of $5.00 per share at the end of the performance period or the Company does not have a sufficient number of shares available under its stock incentive plans at the time of settlement, then a portion of each award will be paid in cash. We recognize expense for these awards based on the probability of achievement of the stated performance targets. The liability for these awards totaled $4.8 million at December 31, 2012.

10. Income taxes

Components of current and deferred income tax expense (benefit) are as follows ($000’s omitted):

	2012				2011				2010
Current provision (benefit)
Federal	$	(8,523	)		$	(71,796	)		$	(114,617	)
State and other	(14,068		)		(28,116		)		(23,200		)
	$	(22,591	)		$	(99,912	)		$	(137,817	)
Deferred provision (benefit)
Federal	$	—			$	—			$	—
State and other	—				—				—
	$	—			$	—			$	—
Income tax expense (benefit)	$	(22,591	)		$	(99,912	)		$	(137,817	)

The following table reconciles the statutory federal income tax rate to the effective income tax rate:

	2012			2011			2010
Income taxes at federal statutory rate	35.0	%		35.0	%		35.0	%
Effect of state and local income taxes, net of federal tax	3.0			3.0			3.0
Deferred tax asset valuation allowance	(37.7	)		(7.0	)		(12.4	)
Tax contingencies	(10.6	)		28.4			5.0
Goodwill impairment	—			(28.7	)		(19.7	)
Other	(2.0	)		1.5			0.3
Effective rate	(12.3	)%		32.2	%		11.2	%

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The net deferred tax asset (liability) is as follows ($000’s omitted):

	At December 31,
	2012				2011
Deferred tax assets:
Non-deductible reserves and other	$	486,990			$	446,605
Inventory valuation reserves	953,266				1,197,271
Net operating loss ("NOL") carryforwards:
Federal	785,302				663,733
State	320,831				299,292
Alternative minimum tax credits	25,338				25,193
Energy credit and charitable contribution carryforward	38,895				38,586
	2,610,622				2,670,680
Deferred tax liabilities:
Capitalized items, including real estate basis differences, deducted for tax, net	(84,637		)		(91,399		)
Trademarks and tradenames	(56,714		)		(61,692		)
	(141,351		)		(153,091		)
Valuation allowance	(2,469,271		)		(2,517,589		)
Net deferred tax asset (liability)	$	—			$	—

Due to the effects of the deferred tax valuation allowance and changes in unrecognized tax benefits, our effective tax rates in 2012, 2011, and 2010 are not correlated to the amount of our income or loss before income taxes. The income tax benefits for 2012, 2011, and 2010 resulted primarily from the favorable resolution of certain federal and state income tax matters.

We had income taxes receivable of $31.9 million and $27.2 million at December 31, 2012 and 2011, respectively. The income taxes receivable at December 31, 2012 related primarily to federal and state carryback claims and amended income tax returns.

We evaluate our deferred tax assets to determine if a valuation allowance is required. We had net deferred tax assets of $2.5 billion at December 31, 2012 and 2011. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. Based on our evaluation, we fully reserved the net deferred tax assets due to the uncertainty of realizing such deferred tax assets. The accounting for deferred taxes is based upon an estimate of future results. Differences between the estimated and actual results could have a material impact on our consolidated results of operations or financial position.

We continue to analyze all available positive and negative evidence in determining the continuing need for a valuation allowance. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, and the duration of statutory carryforward periods. One of the primary pieces of negative evidence we consider is the significant losses we have incurred in recent years, including being in a significant three-year cumulative pre-tax loss position at December 31, 2012. Other negative evidence includes a challenging U.S. macroeconomic environment and uncertainty regarding the timing of a broad, sustainable recovery in the homebuilding industry. However, we earned a profit before income taxes for the year ended December 31, 2012 and have seen significant increases in new orders, backlog, and home sale gross margin. If current business trends continue, including continued improvements in the homebuilding industry, and we continue to be profitable, we believe that there could be sufficient positive evidence to support reducing a large portion of the valuation allowance during 2013. Realization of a portion of our deferred tax assets for state NOL carryforwards and other items, however, is more unlikely than the realization of federal deferred tax assets. This is due to the need to generate sufficient taxable income in each of the respective jurisdictions prior to the expirations of the various state carryforward periods, some of which expire sooner than the 20-year federal NOL carryforwards.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

As a result of our merger with Centex in August 2009, our ability to use certain of Centex’s pre-ownership change NOL carryforwards and built-in losses or deductions is limited by Section 382 of the Internal Revenue Code. Our Section 382 limitation is approximately $67.4 million per year for NOLs, losses realized on built-in loss assets that are sold within 60 months of the ownership change (i.e. before August 2014), and certain deductions. We do not believe that the Section 382 limitation will prevent the Company from using Centex’s pre-ownership change NOL carryforwards and built-in losses or deductions.

Our gross federal NOL carryforward is approximately $2.2 billion, a significant portion of which is subject to the provisions of Internal Revenue Code Section 382. We also have significant gross state NOLs in various tax jurisdictions. These NOLs may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with NOLs expiring between 2013 and 2032.

At December 31, 2012 we had $170.4 million of gross unrecognized tax benefits, of which $166.3 million would impact the effective tax rate if recognized. At December 31, 2011, we had $171.9 million of gross unrecognized tax benefits, of which $170.6 million would impact the effective rate if recognized. Additionally, we had accrued interest and penalties of $31.5 million and $36.9 million at December 31, 2012 and 2011, respectively. In 2012 and 2011, our income tax expense (benefit) included tax related interest and penalties. Such amounts totaled a benefit of $5.4 million in 2012 and $11.4 million in 2011.

We are currently under examination by the IRS and various state taxing jurisdictions and anticipate finalizing certain of the examinations within the next twelve months. The final outcome of these examinations is not yet determinable. It is reasonably possible, within the next twelve months, that unrecognized tax benefits may decrease by up to $24.9 million, excluding interest and penalties, primarily due to expirations of certain statutes of limitations and potential settlements. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2003 to 2012.

A reconciliation of the change in the unrecognized tax benefits is as follows ($000’s omitted):

	2012				2011				2010
Unrecognized tax benefits, beginning of period	$	171,863			$	258,016			$	326,088
Decreases related to tax positions taken during the current period	—				—				—
Increases related to tax positions taken during a prior period	8,782				2,699				55,385
Decreases related to tax positions taken during a prior period	(9,373		)		(79,719		)		(14,025		)
Increases related to tax positions taken during the current period	11,797				1,620				1,441
Decreases related to settlements with taxing authorities	—				—				(94,779		)
Reductions as a result of a lapse of the applicable statute of limitations	(12,644		)		(10,753		)		(16,094		)
Unrecognized tax benefits, end of period	$	170,425			$	171,863			$	258,016

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. 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
December 31, 2012				December 31, 2011
Measured at fair value on a recurring basis:
Residential mortgage loans available-for-sale		Level 2		$	318,931			$	258,075
Interest rate lock commitments		Level 2		6,021				3,551
Forward contracts		Level 2		(646		)		(3,470		)
Whole loan commitments		Level 2		(55		)		11
Measured at fair value on a non-recurring basis:
House and land inventory		Level 3		$	11,243			$	23,766
Disclosed at fair value:
Cash and equivalents (including restricted cash)		Level 1		$	1,476,710			$	1,184,931
Financial Services debt		Level 2		138,795				—
Senior notes		Level 2		2,663,451				2,765,151

Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. Fair values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. Forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan investor commitments are based on market prices for similar instruments from the specific whole loan investor.

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the current quarter. House and land inventory measured at fair value represents those communities for which we have recorded impairments during the current period. See Note 4 for a more detailed discussion of the valuation methods used for inventory.

The carrying amounts of cash and equivalents and Financial Services debt approximate their fair values due to their short-term nature. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $2.5 billion and $3.1 billion, at December 31, 2012 and 2011, respectively.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. Other assets and accrued and other liabilities

Other assets are presented below ($000’s omitted):

	December 31,
	2012				2011
Accounts and notes receivable (Note 1)	$	123,268			$	144,924
Prepaid expenses	74,737				90,786
Deposits and pre-acquisition costs (Note 1)	70,116				57,047
Property and equipment, net (Note 1)	44,183				53,182
Income taxes receivable (Note 10)	31,924				27,154
Other	63,447				74,505
	$	407,675			$	447,598

Accrued and other liabilities are presented below ($000’s omitted):

	December 31,
	2012				2011
Self-insurance liabilities (Note 13)	$	721,284			$	739,029
Loan origination liabilities (Note 13)	164,280				128,330
Compensation-related	119,206				87,583
Warranty (Note 13)	64,098				68,025
Community development district obligations (Note 13)	33,119				38,440
Liability for land, not owned, under option agreements (Note 1)	31,066				24,905
Accrued interest	28,713				37,943
Lease exit liabilities (Note 3)	22,991				29,745
Other	233,306				257,941
	$	1,418,063			$	1,411,941

13. Commitments and Contingencies

Leases

We lease certain property and equipment under non-cancelable operating leases. The future minimum lease payments required under operating leases that have initial or remaining non-cancelable terms in excess of one year as of December 31, 2012 are as follows ($000’s omitted):

Years Ending December 31,
2013	$	29,526
2014	25,510
2015	22,460
2016	15,485
2017	9,291
Thereafter	16,486
Total minimum lease payments (a)	$	118,758

(a)	Minimum payments have not been reduced by minimum sublease rentals of $15.1 million due in the future under non-cancelable subleases.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Net rental expense for 2012, 2011, and 2010 was $24.2 million, $26.7 million, and $37.2 million, respectively, excluding lease exit costs presented in Note 3. Certain leases contain renewal or purchase options and generally provide that we pay for insurance, taxes, and maintenance.

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 that the loans sold meet certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If determined to be at fault, we either repurchase the loans from the investors or reimburse the investors' losses (a “make-whole” payment).

We sell substantially all of the loans we originate to investors in the secondary market within a short period of time after origination. In recent years, we experienced a significant increase in losses as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to us. To date, the significant majority of these losses relates to loans originated in 2006 and 2007, during which period inherently riskier loan products became more common in the mortgage origination market. In 2006 and 2007, we originated $39.5 billion of loans, excluding loans originated by Centex's former subprime loan business sold by Centex in 2006. Because we generally do not retain the servicing rights to the loans we originate, information regarding the current and historical performance, credit quality, and outstanding balances of such loans is limited. Estimating these loan origination liabilities is further complicated by uncertainties surrounding numerous external factors, such as various macroeconomic factors (including unemployment rates and changes in home prices), actions taken by third parties, including the parties servicing the loans, and the U.S. federal government in its dual capacity as regulator of the U.S. mortgage industry and conservator of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac, which own or guarantee the majority of mortgage loans in the U.S.

Most requests received to date relate to make-whole payments on loans that have been foreclosed, generally after a portion of the loan principal had been paid down, which reduces our exposure. Requests undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine our liability. We establish liabilities for such anticipated losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Determining these estimates and the resulting liability requires a significant level of management judgment. We are generally able to cure or refute over 60% of the requests received from investors such that we do not believe repurchases or make-whole payments will ultimately be required. For those requests that we believe will result in repurchases or make-whole payments, actual loss severities are expected to approximate 50% of the outstanding principal balance.

During 2012, 2011, and 2010, we recorded additional provisions for losses as a change in estimate primarily to reflect projected claim volumes in excess of previous estimates. Such provisions for losses are reflected in Financial Services expenses. Our current estimates assume that such requests will continue through 2014. Given the ongoing volatility in the mortgage industry, our lack of visibility into the current status of the review process of loans by investors, the claim volumes we continue to experience, and uncertainties regarding the ultimate resolution of these claims, it is reasonably possible that future losses may exceed our current estimates.

Changes in these liabilities were as follows ($000's omitted):

	2012				2011				2010
Liabilities, beginning of period	$	128,330			$	93,057			$	105,914
Reserves provided	49,025				59,349				16,856
Payments	(13,075		)		(24,076		)		(29,713		)
Liabilities, end of period	$	164,280			$	128,330			$	93,057

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

We entered into an agreement in conjunction with the wind down of Centex's mortgage operations, which ceased loan origination activities in December 2009, that provides a guaranty for one major investor of loans originated by Centex. This guaranty provides that we will honor the potential repurchase obligations of Centex's mortgage operations related to breaches of representations and warranties in the origination of a certain pool of loans. Other than with respect to this pool of loans, our contractual repurchase obligations are limited to our mortgage subsidiaries, which are included in non-guarantor subsidiaries (see Note 14 for a discussion of non-guarantor subsidiaries).

The mortgage subsidiary of Centex also sold loans to a bank for inclusion in residential mortgage-backed securities (“RMBSs”) issued by the bank. In connection with these sales, Centex's mortgage subsidiary entered into agreements pursuant to which it may be required to indemnify the bank for losses incurred by investors in the RMBSs arising out of material errors or omissions in certain information provided by the mortgage subsidiary relating to the loans and loan origination process. In 2011, the bank notified us that it has been named defendant in two lawsuits alleging various violations of federal and state securities laws asserting that untrue statements of material fact were included in the registration statements used to market the sale of two RMBS transactions which included $162 million of loans originated by Centex's mortgage subsidiary. The plaintiffs seek unspecified compensatory and/or rescissory damages on behalf of persons who purchased the securities. Neither Centex's mortgage subsidiary nor the Company is named as a defendant in these actions. These actions are in their preliminary stage, and we cannot yet quantify Centex's mortgage subsidiary's potential liability as a result of these indemnification obligations. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or cash flows of the Company. We are aware of six other RMBS transactions with such indemnity provisions that include an aggregate $116 million of loans, and we are not aware of any current or threatened legal proceedings regarding those transactions.

Community development and other special district obligations

A community development district or similar development authority (“CDD”) is a unit of local government created under various state statutes that utilizes the proceeds from the sale of bonds to finance the construction or acquisition of infrastructure assets of a development. A portion of the liability associated with the bonds, including principal and interest, is assigned to each parcel of land within the development. This debt is typically paid by subsequent special assessments levied by the CDD on the landowners. Generally, we are only responsible for paying the special assessments for the period in which we are the landowner of the applicable parcels. However, in certain limited instances we record a liability for future assessments that are fixed or determinable for a fixed or determinable period. At December 31, 2012 and 2011, we had recorded $33.1 million and $38.4 million, respectively, in accrued liabilities for outstanding CDD obligations. During 2011 and 2010, we repurchased at a discount prior to their maturity CDD obligations with aggregate principal balances of $26.6 million and $124.1 million, respectively, in order to improve the future financial performance of the related communities. The discounts of $5.2 million in 2011 and $12.9 million in 2010 are recognized as a reduction of cost of revenues over the lives of the applicable communities, which will extend for several years. There were no repurchases during 2012.

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 $179.2 million and $1.0 billion at December 31, 2012, respectively, and $235.9 million and $1.2 billion at December 31, 2011, respectively. In the event any such letter of credit or surety bonds are called, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be called. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 ten 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):

	2012				2011				2010
Warranty liabilities, beginning of period	$	68,025			$	80,195			$	96,110
Reserves provided	45,705				43,875				54,164
Payments	(45,365		)		(54,766		)		(69,789		)
Other adjustments	(4,267		)		(1,279		)		(290		)
Warranty liabilities, end of period	$	64,098			$	68,025			$	80,195

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 higher per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or to participate in a project-specific insurance program provided by the Company. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by the Company. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid on insured claims

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

satisfy our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses relating to legal fees, expert fees, and claims handling expenses) on an undiscounted basis at the time product revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate an estimate of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims. These estimates make up a significant portion of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable.

Our recorded reserves for all such claims totaled $721.3 million and $739.0 million at December 31, 2012 and 2011, respectively, the vast majority of which relate 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 74% and 78% of the total general liability reserves at December 31, 2012 and 2011, 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.

Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. Because the majority of our recorded reserves relates to IBNR, adjustments to reserve amounts for individual existing claims generally do not impact the recorded reserves materially. However, changes in the frequency and timing of reported claims and the estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Because of the inherent uncertainty in estimating future losses related to these claims, actual costs could differ significantly from estimated costs.

We have experienced a high level of insurance-related expenses in recent years, primarily due to the adverse development of general liability claims, the frequency and severity of which have increased significantly over historical levels. During 2010, we experienced a greater than anticipated frequency of newly reported claims and a significant increase in specific case reserves related to certain known claims. The general nature of these claims was not out of the ordinary, but the frequency and severity of the claims were in excess of our historical experience. As a result of these unfavorable trends, we recorded additional reserves totaling $280.4 million ($0.74 per basic and diluted share) within selling, general, and administrative expenses. Substantially all of this additional reserve related to general liability exposures, a large portion of which resulted from revising our actuarial assumptions surrounding the long-term frequency, severity, and development of claims. During the industry downturn over the last several years, and especially in 2010, we experienced adverse claim frequency and severity compared with longer term averages. In 2010, we deemed it appropriate to assume that the long-term future frequency, severity, and development of claims will most closely resemble the claims activity experienced in recent years.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in these liabilities were as follows ($000's omitted):

	2012				2011				2010
Balance, beginning of period	$	739,029			$	787,918			$	551,020
Reserves provided	54,262				48,359				313,606
Liabilities assumed with Centex merger	—				—				2,514
Payments	(72,007		)		(97,248		)		(79,222		)
Balance, end of period	$	721,284			$	739,029			$	787,918

As reflected in the above table, insurance-related liabilities increased $2.5 million upon completion of a final valuation of the Centex merger in 2010. The reserves provided reflected in the above table are classified within selling, general, and administrative expenses.

14. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by each of the Company's wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by, and the operations of, the combined groups.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2012

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	146,168			$	1,063,943			$	194,649			$	—			$	1,404,760
Restricted cash	54,546				3,365				14,039				—				71,950
House and land inventory	—				4,210,201				3,845				—				4,214,046
Land held for sale	—				91,104				—				—				91,104
Land, not owned, under option agreements	—				31,066				—				—				31,066
Residential mortgage loans available- for-sale	—				—				318,931				—				318,931
Investments in unconsolidated entities	1,528				40,973				3,128				—				45,629
Other assets	28,951				324,109				54,615				—				407,675
Intangible assets	—				149,248				—				—				149,248
Investments in subsidiaries and intercompany accounts, net	4,723,466				7,198,710				6,296,915				(18,219,091		)		—
	$	4,954,659			$	13,112,719			$	6,886,122			$	(18,219,091	)		$	6,734,409
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	56,565			$	1,343,653			$	297,302			$	—			$	1,697,520
Income tax liabilities	198,865				—				—				—				198,865
Financial Services debt	—				—				138,795				—				138,795
Senior notes	2,509,613				—				—				—				2,509,613
Total liabilities	2,765,043				1,343,653				436,097				—				4,544,793
Total shareholders’ equity	2,189,616				11,769,066				6,450,025				(18,219,091		)		2,189,616
	$	4,954,659			$	13,112,719			$	6,886,122			$	(18,219,091	)		$	6,734,409

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2011

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
ASSETS
Cash and equivalents	$	119,287			$	875,561			$	88,223			$	—			$	1,083,071
Restricted cash	83,199				3,255				15,406				—				101,860
House and land inventory	—				4,632,337				4,131				—				4,636,468
Land held for sale	—				135,307				—				—				135,307
Land, not owned, under option agreements	—				24,905				—				—				24,905
Residential mortgage loans available- for-sale	—				—				258,075				—				258,075
Securities purchased under agreements to resell	127,327				—				(127,327		)		—				—
Investments in unconsolidated entities	1,527				31,836				2,625				—				35,988
Other assets	32,620				364,770				50,208				—				447,598
Intangible assets	—				162,348				—				—				162,348
Investments in subsidiaries and intercompany accounts, net	4,937,002				6,533,838				6,366,758				(17,837,598		)		—
	$	5,300,962			$	12,764,157			$	6,658,099			$	(17,837,598	)		$	6,885,620
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, customer deposits, accrued and other liabilities	$	70,690			$	1,310,972			$	273,686			$	—			$	1,655,348
Income tax liabilities	203,313				—				—				—				203,313
Senior notes	3,088,344				—				—				—				3,088,344
Total liabilities	3,362,347				1,310,972				273,686				—				4,947,005
Total shareholders’ equity	1,938,615				11,453,185				6,384,413				(17,837,598		)		1,938,615
	$	5,300,962			$	12,764,157			$	6,658,099			$	(17,837,598	)		$	6,885,620

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the year ended December 31, 2012

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Revenues:
Homebuilding
Home sale revenues	$	—			$	4,552,412			$	—			$	—			$	4,552,412
Land sale revenues	—				106,698				—				—				106,698
	—				4,659,110				—				—				4,659,110
Financial Services	—				2,082				158,806				—				160,888
	—				4,661,192				158,806				—				4,819,998
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				3,833,451				—				—				3,833,451
Land sale cost of revenues	—				94,880				—				—				94,880
	—				3,928,331				—				—				3,928,331
Financial Services expenses	379				567				134,565				—				135,511
Selling, general and administrative expenses	—				515,283				(826		)		—				514,457
Other expense (income), net	32,027				33,506				765				—				66,298
Interest income	(229		)		(4,597		)		(87		)		—				(4,913		)
Interest expense	819				—				—				—				819
Intercompany interest	587,281				(573,852		)		(13,429		)		—				—
Equity in (earnings) loss of unconsolidated entities	(1		)		(3,555		)		(503		)		—				(4,059		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(620,276		)		765,509				38,321				—				183,554
Income tax expense (benefit)	426				(22,299		)		(718		)		—				(22,591		)
Income (loss) before equity in income (loss) of subsidiaries	(620,702		)		787,808				39,039				—				206,145
Equity in income (loss) of subsidiaries	826,847				34,596				476,806				(1,338,249		)		—
Net income (loss)	206,145				822,404				515,845				(1,338,249		)		206,145
Other comprehensive income (loss)	314				—				—				—				314
Comprehensive income (loss)	$	206,459			$	822,404			$	515,845			$	(1,338,249	)		$	206,459

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the year ended December 31, 2011

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Revenues:
Homebuilding
Home sale revenues	$	—			$	3,950,743			$	—			$	—			$	3,950,743
Land sale revenues	—				82,853				—				—				82,853
	—				4,033,596				—				—				4,033,596
Financial Services	—				1,367				101,727				—				103,094
	—				4,034,963				101,727				—				4,136,690
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				3,444,398				—				—				3,444,398
Land sale cost of revenues	—				59,279				—				—				59,279
	—				3,503,677				—				—				3,503,677
Financial Services expenses	343				448				136,875				—				137,666
Selling, general and administrative expenses	33,144				488,746				(2,307		)		—				519,583
Other expense (income), net	5,581				288,298				(777		)		—				293,102
Interest income	(253		)		(4,443		)		(359		)		—				(5,055		)
Interest expense	1,313				—				—				—				1,313
Intercompany interest	39,060				(27,572		)		(11,488		)		—				—
Equity in (earnings) loss of unconsolidated entities	(5		)		(3,196		)		(95		)		—				(3,296		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(79,183		)		(210,995		)		(20,122		)		—				(310,300		)
Income tax expense (benefit)	(2,623		)		(99,635		)		2,346				—				(99,912		)
Income (loss) before equity in income (loss) of subsidiaries	(76,560		)		(111,360		)		(22,468		)		—				(210,388		)
Equity in income (loss) of subsidiaries	(133,828		)		(25,427		)		(88,998		)		248,253				—
Net income (loss)	(210,388		)		(136,787		)		(111,466		)		248,253				(210,388		)
Other comprehensive income (loss)	213				—				—				—				213
Comprehensive income (loss)	$	(210,175	)		$	(136,787	)		$	(111,466	)		$	248,253			$	(210,175	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the year ended December 31, 2010

($000’s omitted)

	Unconsolidated												Eliminating Entries				Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries
Revenues:
Homebuilding
Home sale revenues	$	—			$	4,419,812			$	—			$	—			$	4,419,812
Land sale revenues	—				27,815				—				—				27,815
	—				4,447,627				—				—				4,447,627
Financial Services	—				3,119				118,544				—				121,663
	—				4,450,746				118,544				—				4,569,290
Homebuilding Cost of Revenues:
Home sale cost of revenues	—				4,006,385				—				—				4,006,385
Land sale cost of revenues	—				53,555				—				—				53,555
	—				4,059,940				—				—				4,059,940
Financial Services expenses	338				(1,462		)		117,246				—				116,122
Selling, general and administrative expenses	64,197				629,099				201,806				—				895,102
Other expense (income), net	38,899				707,647				(4,161		)		—				742,385
Interest income	—				(9,060		)		(471		)		—				(9,531		)
Interest expense	2,802				—				(73		)		—				2,729
Intercompany interest	169,158				(169,010		)		(148		)		—				—
Equity in (earnings) loss of unconsolidated entities	(11		)		(3,867		)		967				—				(2,911		)
Income (loss) before income taxes and equity in income (loss) of subsidiaries	(275,383		)		(762,541		)		(196,622		)		—				(1,234,546		)
Income tax expense (benefit)	58,318				(136,741		)		(59,394		)		—				(137,817		)
Income (loss) before equity in income (loss) of subsidiaries	(333,701		)		(625,800		)		(137,228		)		—				(1,096,729		)
Equity in income (loss) of subsidiaries	(763,028		)		(5,009		)		(172,241		)		940,278				—
Net income (loss)	(1,096,729		)		(630,809		)		(309,469		)		940,278				(1,096,729		)
Other comprehensive income (loss)	730				—				—				—				730
Comprehensive income (loss)	$	(1,095,999	)		$	(630,809	)		$	(309,469	)		$	940,278			$	(1,095,999	)

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2012

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	(582,762	)		$	1,332,342			$	10,560			$	—			$	760,140
Cash flows from investing activities:
Distributions from unconsolidated entities	—				3,029				—				—				3,029
Investments in unconsolidated entities	—				(16,456		)		—				—				(16,456		)
Net change in loans held for investment	—				—				836				—				836
Change in restricted cash related to letters of credit	28,653				—				—				—				28,653
Proceeds from the sale of property and equipment	—				7,586				—				—				7,586
Capital expenditures	—				(10,831		)		(3,111		)		—				(13,942		)
Net cash provided by (used in) investing activities	28,653				(16,672		)		(2,275		)		—				9,706
Cash flows from financing activities:
Financial Services borrowings (repayments)	—				—				138,795				—				138,795
Other borrowings (repayments)	(620,700		)		1,900				—				—				(618,800		)
Stock option exercises	32,809				—				—				—				32,809
Stock repurchases	(961		)		—				—				—				(961		)
Intercompany activities, net	1,169,842				(1,129,188		)		(40,654		)		—				—
Net cash provided by (used in) financing activities	580,990				(1,127,288		)		98,141				—				(448,157		)
Net increase (decrease) in cash and equivalents	26,881				188,382				106,426				—				321,689
Cash and equivalents at beginning of year	119,287				875,561				88,223				—				1,083,071
Cash and equivalents at end of year	$	146,168			$	1,063,943			$	194,649			$	—			$	1,404,760

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2011

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	(86,000	)		$	520,024			$	(416,745	)		$	—			$	17,279
Cash flows from investing activities:
Distributions from unconsolidated entities	—				4,531				—				—				4,531
Investments in unconsolidated entities	—				(4,603		)		—				—				(4,603		)
Net change in loans held for investment	—				—				325				—				325
Change in restricted cash related to letters of credit	(83,199		)		—				—				—				(83,199		)
Proceeds from the sale of property and equipment	—				10,555				—				—				10,555
Capital expenditures	—				(18,331		)		(2,907		)		—				(21,238		)
Net cash provided by (used in) investing activities	(83,199		)		(7,848		)		(2,582		)		—				(93,629		)
Cash flows from financing activities:
Other borrowings (repayments)	(320,973		)		(160		)		—				—				(321,133		)
Stock repurchases	(2,836		)		—				—				—				(2,836		)
Intercompany activities, net	602,295				(743,078		)		140,783				—				—
Net cash provided by (used in) financing activities	278,486				(743,238		)		140,783				—				(323,969		)
Net increase (decrease) in cash and equivalents	109,287				(231,062		)		(278,544		)		—				(400,319		)
Cash and equivalents at beginning of year	10,000				1,106,623				366,767				—				1,483,390
Cash and equivalents at end of year	$	119,287			$	875,561			$	88,223			$	—			$	1,083,071

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONSOLIDATING STATEMENT OF CASH FLOWS

For the year ended December 31, 2010

($000’s omitted)

	Unconsolidated																Consolidated PulteGroup, Inc.
	PulteGroup, Inc.				Guarantor Subsidiaries				Non-Guarantor Subsidiaries				Eliminating Entries
Net cash provided by (used in) operating activities	$	552,697			$	34,853			$	4,574			$	—			$	592,124
Cash flows from investing activities:
Distributions from unconsolidated entities	—				4,231				—				—				4,231
Investments in unconsolidated entities	—				(21,623		)		(1,267		)		—				(22,890		)
Net change in loans held for investment	—				—				12,603				—				12,603
Proceeds from the sale of property and equipment	—				1,762				18				—				1,780
Capital expenditures	—				(13,168		)		(2,011		)		—				(15,179		)
Net cash provided by (used in) investing activities	—				(28,798		)		9,343				—				(19,455		)
Cash flows from financing activities:
Financial Services borrowings (repayments)	—				—				(18,394		)		—				(18,394		)
Other borrowings (repayments)	(934,473		)		(1,444		)		—				—				(935,917		)
Stock option exercises	8,668				—				—				—				8,668
Stock repurchases	(4,023		)		—				—				—				(4,023		)
Intercompany activities, net	387,131				(404,757		)		17,626				—				—
Net cash provided by (used in) financing activities	(542,697		)		(406,201		)		(768		)		—				(949,666		)
Net increase (decrease) in cash and equivalents	10,000				(400,146		)		13,149				—				(376,997		)
Cash and equivalents at beginning of year	—				1,506,769				353,618				—				1,860,387
Cash and equivalents at end of year	$	10,000			$	1,106,623			$	366,767			$	—			$	1,483,390

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

15. Quarterly Results (Unaudited)

UNAUDITED QUARTERLY INFORMATION

(000’s omitted, except per share data)

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total (c)
2012
Homebuilding:
Revenues	$	852,184			$	1,033,154			$	1,255,327			$	1,518,445			$	4,659,110
Cost of revenues	745,563				876,990				1,044,765				1,261,012				3,928,331
Income (loss) before income taxes (a)	(20,352		)		23,939				79,179				75,225				157,991
Financial Services:
Revenues	$	28,852			$	36,251			$	47,264			$	48,521			$	160,888
Income (loss) before income taxes (b)	6,861				15,987				26,727				(24,012		)		25,563
Consolidated results:
Revenues	$	881,036			$	1,069,405			$	1,302,591			$	1,566,966			$	4,819,998
Income (loss) before income taxes	(13,491		)		39,926				105,906				51,213				183,554
Income tax benefit	(1,825		)		(2,510		)		(10,727		)		(7,529		)		(22,591		)
Net income (loss)	$	(11,666	)		$	42,436			$	116,633			$	58,742			$	206,145
Net income (loss) per share:
Basic	$	(0.03	)		$	0.11			$	0.31			$	0.15			$	0.54
Diluted	$	(0.03	)		$	0.11			$	0.30			$	0.15			$	0.54
Number of shares used in calculation:
Basic	380,502				380,655				381,355				383,404				381,562
Effect of dilutive securities	—				1,548				3,215				5,900				3,002
Diluted	380,502				382,203				384,570				389,304				384,564

(a)	Homebuilding income (loss) before income taxes includes losses on debt retirements totaling $32.1 million in the 4th Quarter.

(b)	Financial Services income (loss) before income taxes includes additional loan origination reserves of $49.0 million in the 4th Quarter.

(c)	Due to rounding, the sum of quarterly results may not equal the total for the year. Additionally, quarterly and year-to-date computations of per share amounts are made independently.

PULTEGROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

UNAUDITED QUARTERLY INFORMATION

(000’s omitted, except per share data)

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter				Total (c)
2011
Homebuilding:
Revenues	$	783,767			$	904,831			$	1,114,027			$	1,230,971			$	4,033,596
Cost of revenues	685,960				793,465				944,882				1,079,370				3,503,677
Income (loss) before income taxes (a)	(46,365		)		(36,690		)		(211,126		)		18,351				(275,830		)
Financial Services:
Revenues	$	21,435			$	22,381			$	27,904			$	31,374			$	103,094
Income (loss) before income taxes (b)	973				(16,643		)		8,626				(27,426		)		(34,470		)
Consolidated results:
Revenues	$	805,202			$	927,212			$	1,141,931			$	1,262,345			$	4,136,690
Income (loss) before income taxes	(45,392		)		(53,333		)		(202,500		)		(9,075		)		(310,300		)
Income tax expense (benefit)	(5,866		)		2,052				(73,202		)		(22,896		)		(99,912		)
Net income (loss)	$	(39,526	)		$	(55,385	)		$	(129,298	)		$	13,821			$	(210,388	)
Net income (loss) per share:
Basic	$	(0.10	)		$	(0.15	)		$	(0.34	)		$	0.04			$	(0.55	)
Diluted	$	(0.10	)		$	(0.15	)		$	(0.34	)		$	0.04			$	(0.55	)
Number of shares used in calculation:
Basic	379,544				379,781				380,025				380,149				379,877
Effect of dilutive securities	—				—				—				1,112				—
Diluted	379,544				379,781				380,025				381,261				379,877

(a)

Homebuilding income (loss) before income taxes includes land-related charges of $0.7 million, $6.8 million, $3.9 million, and $24.4 million in the 1st Quarter, 2nd Quarter, 3rd Quarter, and 4th Quarter, respectively; goodwill impairment charges totaling $240.5 million in the 3rd Quarter; and losses on debt retirements of $3.5 million and $2.1 million in the 2nd Quarter and 4th Quarter, respectively.

(b)	Financial Services income (loss) before income taxes includes additional loan origination reserves of $19.3 million and $40.0 million in the 2nd Quarter and 4th Quarter, respectively.

(c)	Due to rounding, the sum of quarterly results may not equal the total for the year. Additionally, quarterly and year-to-date computations of per share amounts are made independently.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of PulteGroup, Inc.

We have audited the accompanying consolidated balance sheets of PulteGroup, Inc. (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PulteGroup, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PulteGroup, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 6, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Detroit, Michigan

February 6, 2013