PulteGroup, Inc. — Q1 2017 Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Amounts are in U.S. dollars. The company is a U.S. homebuilder with mortgage and title operations.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total revenue | $1.629 billion | $1.433 billion |
| Income before tax | $139.3 million | $118.2 million |
| Net income | $91.5 million | $83.3 million |
| Diluted EPS | $0.28 | $0.24 |
| Operating cash flow | $39.8 million | $(62.9) million |
| Cash, cash equivalents and restricted cash | $423.9 million | $723.2 million |
| House and land inventory | $7.028 billion | $6.771 billion |
- Revenue increased 14%; home sale revenue rose 14% to $1.585 billion. Closings were up 7% to 4,225 and average selling price increased 6% to $375,000.
- Home sale gross margin declined to 23.2% from 25.5%, reflecting mix and higher construction and land costs. SG&A was $236.3 million, down 2%; as a share of home sale revenue it fell to 14.9% from 17.4%.
- Financial Services revenue increased 17% to $41.8 million and pretax income rose 38% to $13.5 million. Mortgage originations totaled $806.4 million; the capture rate was 80.3%, versus 81.1%.
- Senior notes were $3.110 billion; Financial Services debt was $140.4 million. No revolving-credit borrowings were outstanding. The $750 million facility had $523.1 million available after letters of credit. Homebuilding debt to capitalization, excluding Financial Services debt, was 40.0%.
- Quarter-end unrestricted cash was $397.8 million; restricted cash was $26.1 million. The company declared $28.8 million of dividends and repurchased 4.7 million shares for $100 million. Remaining repurchase authorization was $904.8 million.
Changes versus the prior-year quarter
- Pretax income rose 18% and net income rose 10%; diluted EPS increased from $0.24 to $0.28. The effective tax rate increased to 34.3% from 29.5%, partly because the prior-year period benefited from resolution of state tax matters.
- Net new orders increased 8% to 6,126 units and 16% in dollars to $2.446 billion. Backlog rose 6% to 9,323 homes and 13% in value to $3.802 billion. The cancellation rate improved to 12% from 13%.
- Operating cash flow turned positive, primarily due to pretax earnings and a seasonal reduction in mortgage loans held for sale; inventory investment partly offset these sources. Q1 2016 investing cash use included the Wieland acquisition, unlike Q1 2017.
- Homebuilding pretax income included $15.0 million of expense associated with the resolution of insurance matters. The company also reported a $15.0 million write-off of insurance receivables in connection with settling policies.
Outlook, management commentary and risks
- Management described U.S. housing demand as improving, citing job creation, consumer confidence, supportive interest rates and limited new-home supply. Net new order dollars were up 16% year to date, and management expects to turn over and replace approximately one-third of communities in 2017.
- The company emphasized disciplined land investment, smaller projects, shorter land-supply duration and use of options. Management expects 2017 amortized interest costs as a percentage of revenue to approximate 2016 levels. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management noted rising house-construction and land costs, entitlement and development delays, and potential pressure from inflation or higher mortgage rates. Results are seasonal and quarterly performance may not indicate full-year results.
- Land option agreements had $2.0 billion of remaining purchase price and $195.7 million of deposits and pre-acquisition costs. Outstanding letters of credit were $226.9 million and surety bonds approximately $1.1 billion.
- Self-insured and other insurance-program reserves were $835.3 million; related insurance receivables were $291.8 million, including $99.3 million subject to litigation with insurers. Management considered collection probable, but actual claim costs and recoveries may differ materially from estimates.
- The company disclosed ordinary-course litigation and regulatory matters, tax examinations, and a limited-recourse joint-venture guaranty. It stated that it did not expect resolution of pending legal matters to have a material adverse effect, while noting losses above recorded reserves could be significant.
Important facts for investors to verify
- Whether order growth and the $3.8 billion backlog convert into closings at expected prices and margins.
- Whether gross-margin pressure from construction and land costs persists, and how the $15.0 million insurance-related expense affects comparability.
- The adequacy of the $835.3 million insurance reserves and recoverability of disputed insurance receivables, particularly the $99.3 million under litigation.
- Liquidity and refinancing needs, including the $123 million senior note due October 2017 and the Financial Services repurchase agreement scheduled to expire in August 2017.
- Land-option commitments, surety bonds, letters of credit and joint-venture guarantees, as well as potential effects of higher rates, labor or material costs, and development delays.