PulteGroup, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless noted, financial amounts below are in U.S. dollars.
Business context and results
PulteGroup is a U.S. homebuilder, with mortgage banking, title and insurance brokerage operations. Results benefited from higher home prices and margins on homes contracted during the strong-demand period of 2021 and early 2022, while demand weakened as mortgage rates rose.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $3.944 billion | $3.479 billion | $11.058 billion | $9.568 billion |
| Net income | $628 million | $476 million | $1.735 billion | $1.283 billion |
| Diluted EPS | $2.69 | $1.82 | $7.22 | $4.85 |
| Home sale gross margin | 30.1% | 26.5% | 30.1% | 26.2% |
Q3 home sale revenue rose 16% to $3.840 billion, with closings up 1% to 7,047 and average selling price up 15% to $545,000. For the nine months, home sale revenue rose 17% to $10.720 billion, driven principally by a 17% increase in average selling price. Income before tax increased 37% in Q3 and 46% year to date; comparisons include a $61.5 million debt-retirement loss in 2021 and a $56.6 million insurance-reserve reversal in 2021.
Cash flow, debt and liquidity
- Operating cash flow was negative $304 million for the nine months, versus positive $548 million in 2021. A $2.706 billion inventory build, including more homes in production and extended construction cycles, was the primary cash use; mortgage loans held for sale declined by $508 million.
- Cash, cash equivalents and restricted cash were $291 million at September 30, versus $1.834 billion at December 31, 2021. The company also used $975 million for share repurchases and paid $110 million in dividends during the period.
- Notes payable totaled $2.045 billion; the revolving credit facility had $319 million drawn and $590 million of remaining capacity. The company reported $231 million of unrestricted cash and a 22.5% debt-to-capitalization ratio, excluding Financial Services debt, versus 21.3% at year-end 2021.
- The revolving facility was renewed in June, with maximum capacity of $1.3 billion, an uncommitted accordion to $1.8 billion, and maturity extended to June 2027. Senior notes totaled approximately $2.0 billion, with the next $500 million maturity in March 2026. Pulte Mortgage had $338 million outstanding under its repurchase agreement, which matures July 2023.
Material changes and operating trends
- Net new orders fell 28% in Q3 and 23% year to date. The Q3 cancellation rate rose to 24%, from 10% a year earlier. Backlog units were down 14% year over year, although backlog dollars were up 3% to $10.581 billion.
- Construction time was about seven weeks longer than a year earlier, amid material and labor constraints and municipal approval delays. Homes in production rose 21% year over year, with increased unsold homes under construction.
- Financial Services income before tax declined 43% in Q3 and 35% year to date, primarily because of a lower mortgage capture rate and lower revenue per loan. Year-to-date capture rate was 78.7%, down from 86.1%.
- Inventory increased to $11.773 billion from $9.048 billion at year-end 2021. Land option deposits and pre-acquisition costs were $449 million, against $6.016 billion of remaining purchase prices.
Outlook, risks and unusual items
Management expects the challenging housing environment to continue through at least 2023, resulting in lower revenue and profitability. It has slowed housing starts, increased sales incentives, taken additional pricing actions, reassessed land-option underwriting and walked away from some land agreements. No specific numerical earnings or revenue guidance was provided. Management cited the U.S. housing shortage and stated it believes available liquidity and financing resources are sufficient for business needs.
- Key pressures include higher mortgage rates and reduced affordability, inflation, weaker buyer confidence, possible limits on pricing, construction costs and labor availability, supply-chain delays, and potential changes in land values and demand.
- Q3 included $24.5 million of write-offs on land deposits and pre-acquisition costs; nine-month charges were $32.5 million, versus $6.8 million a year earlier. A $20.7 million tax benefit from the retroactive extension of energy-efficient home credits was included in 2022 tax expense.
- General-liability reserves were $679 million, and management cautioned that long-tail construction-defect claims and uncertain insurance recoveries could cause actual costs to differ materially from estimates. The filing says litigation and regulatory matters are not expected to have a material adverse impact, but outcomes cannot be predicted with certainty.
- Letters of credit and surety bonds totaled $341 million and approximately $2.2 billion, respectively. Management did not believe a material amount would be drawn. The company was in compliance with its disclosed credit covenants.
Most important facts for investors to verify
- Whether order trends, cancellations and backlog convert into closings at expected prices as mortgage rates and affordability change.
- Whether margins hold as incentives rise and pricing becomes more challenging against construction costs.
- How inventory growth and construction-cycle delays affect operating cash flow and liquidity.
- Land-option commitments, deposit write-offs and potential inventory impairment exposure if housing conditions weaken further.
- Refinancing or renewal of the Pulte Mortgage facility before its July 2023 maturity, and the evolution of insurance and warranty reserves.