PulteGroup, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
PulteGroup is a U.S. homebuilder with six Homebuilding regions and mortgage and title operations in Financial Services. Management described housing demand as improving but still on a slow recovery path, with industry new-home sales below historical averages. In January 2016, the company acquired substantially all assets of JW Homes (Wieland) for $430 million in cash, expanding its Southeast operations.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,799.9 | $1,280.3 | $3,232.5 | $2,413.6 |
| Income before tax | $189.6 | $167.6 | $307.8 | $263.4 |
| Net income | $117.8 | $103.3 | $201.1 | $158.3 |
| Diluted EPS | $0.34 | $0.28 | $0.57 | $0.43 |
| Home sale gross margin | 21.5% | 23.3% | 21.7% | 23.0% |
- Q2 home sale revenue rose 41%, supported by 27% more closings and an 11% higher average selling price ($367,000). For the first half, home sale revenue increased 35%, closings rose 23%, and average selling price increased 10%.
- Homebuilding pretax income increased 9% in Q2 and 13% for the first half. Financial Services pretax income rose 71% and 78%, respectively, as mortgage volume and revenue per loan increased.
- Home sale gross margin declined 180 basis points in Q2 and 130 basis points for the first half. Wieland-related fair value adjustments reduced margin by about 70 basis points in both periods; higher construction and land costs also weighed on margins.
- SG&A was $192.3 million in Q2 and $383.3 million for the first half. SG&A as a share of home sale revenue was 11.0% in Q2 and 12.2% year to date.
- Cash and equivalents were $229.2 million at June 30, down from $754.2 million at year-end 2015; restricted cash was $26.5 million. Six-month operating cash flow was negative $325.3 million, primarily reflecting inventory investment. Inventory rose to $6.63 billion from $5.45 billion at year-end.
- Six-month investing cash use was $459.4 million, including the $430.0 million Wieland acquisition. Financing provided $259.7 million, including proceeds from debt issuance.
- At June 30, senior notes were $2.10 billion, the term loan was $499.2 million, and Financial Services debt was $189.6 million. Homebuilding debt-to-capitalization, excluding Financial Services debt, was 35.1%. The company reported compliance with debt covenants.
- The amended revolving credit facility increased maximum capacity to $750 million and extended maturity to June 2019; there were no borrowings and $227.2 million of letters of credit outstanding. The term loan’s initial maturity is January 2017, with an option to extend up to 12 months. Pulte Mortgage’s $200 million repurchase facility expires in September 2016 and had $189.6 million outstanding.
Material changes versus prior comparable periods
- Growth in revenue and earnings accompanied substantially higher closings and selling prices, but gross margins declined and operating costs increased.
- Backlog at June 30 increased 8% by units and 21% by dollars year over year, to 9,679 homes and $3.75 billion. Net new orders rose 11% by units and 21% by dollars in Q2; the cancellation rate increased to 14% from 13%.
- Active communities increased 11% to 700. Homes in production increased 26% year over year to 9,771, including more unsold homes under construction.
- The company issued $1.0 billion of senior notes in February, using proceeds in part to retire $465.2 million of notes that matured in May. The new notes comprise $300 million at 4.25% due 2021 and $700 million at 5.50% due 2026.
- Six-month share repurchases were $97.7 million, compared with $313.0 million in the prior-year period. The company declared $62.7 million of dividends. Share count used for diluted EPS declined year over year.
Outlook, commentary, risks, and unusual items
- Management expected elevated new-community openings during 2016 and said it was pursuing disciplined land investment, smaller projects, shorter land-supply horizons, and greater use of land options. It expected amortized interest costs as a percentage of revenue to remain below 2015 levels for the rest of 2016.
- Management noted entitlement and land-development delays, and said it intended to moderate spec-home starts over the year. It did not provide specific full-year revenue or earnings guidance in the supplied filing text.
- On July 21, 2016, the company announced a target to reduce SG&A to 9% or less of 2017 home sale revenue, from an expected 10% in 2016. On July 20, the board increased the share repurchase authorization by $1.0 billion to $1.5 billion; the company planned $250 million of repurchases in each of Q3 and Q4 2016 and $1.0 billion in 2017.
- Unusual costs included $7.4 million of Q2 write-offs of deposits and pre-acquisition costs, primarily for a California project the company chose not to complete, and $7.3 million of lease-exit costs associated with the substantial completion of the headquarters relocation from Michigan to Georgia. The prior-year comparable periods benefited from a $26.9 million general-liability reserve reversal tied to a legal settlement.
- Key risks cited include changes in mortgage rates and financing availability, land and construction costs, labor availability and cost, insurance availability, weather and permitting delays, regulatory and legal matters, and housing-market and consumer-demand conditions.
- Self-insured claim reserves were $707.3 million at June 30. The company had $136.7 million of recorded insurance receivables, including $108.1 million involved in litigation with insurers; management considered collection probable but noted uncertainty in claims and recoveries. Outstanding letters of credit and surety bonds were $227.2 million and approximately $1.1 billion, respectively; management did not expect a material amount to be drawn.
- Management said it did not believe pending litigation and regulatory matters would have a material adverse impact, while acknowledging that losses above recorded estimates could result in significant additional charges. Deferred tax assets, net, were $1.28 billion and depend on estimates of future taxable results.
- After quarter-end, the company agreed with Elliott to expand the board to 13 members and appoint three nominees, with specified voting and standstill terms. The filing also disclosed the agreement’s exceptions and termination conditions.
Important facts for investors to verify
- Whether backlog growth, new orders, and higher closings convert into revenue without further material erosion in home sale gross margins.
- How much revenue, margin, and integration cost growth is attributable to Wieland, and whether the acquired operations meet expected returns.
- Whether inventory investment and planned community openings generate adequate cash returns, given negative operating cash flow and increased land and home inventory.
- The funding, timing, and sustainability of planned share repurchases and dividends relative to cash balances, debt maturities, and the $1.0 billion repurchase plan for 2017.
- Progress on the 2017 SG&A target, the September 2016 mortgage repurchase-facility maturity, and the January 2017 term-loan maturity and extension option.
- Changes in construction-defect reserves, insurance recoveries and related litigation, warranty costs, and other legal or regulatory contingencies.