PulteGroup, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative figures are for Q1 2015 unless otherwise noted. PulteGroup operates U.S. homebuilding businesses and mortgage and title operations. It reported results across six homebuilding segments and Financial Services.
Financial and operating performance
| Metric | Q1 2016 | Comparison |
|---|---|---|
| Total revenue | $1.433 billion | Up 26% from $1.133 billion |
| Homebuilding revenue | $1.397 billion | Up 26%; home-sale revenue rose 28% |
| Income before taxes | $118.2 million | Up from $95.8 million |
| Net income / diluted EPS | $83.3 million / $0.24 | Up from $55.0 million / $0.15 |
| Home-sale gross margin | 21.9% | Down 80 basis points from 22.7% |
| SG&A as a share of home-sale revenue | 13.7% | Improved from 14.8% |
| Home closings | 3,945 homes | Up 17%; average selling price increased 9% to $353,000 |
| Net new orders | 5,652 homes; $2.114 billion | Units up 10%; dollars up 24% |
| Backlog at quarter end | 8,755 homes; $3.359 billion | Units up 15%; dollars up 31% |
| Financial Services pretax income | $9.8 million | Up 93%; revenue increased 30% |
Management attributed higher homebuilding income primarily to greater closing volume and average selling prices, partly offset by lower gross margin and higher overhead. Financial Services benefited from higher origination volume and revenue per loan. The overall effective tax rate fell to 29.5% from 42.6%, including favorable resolution of certain state tax matters in 2016.
Cash, liquidity and debt
- Cash and equivalents were $995.7 million at March 31, 2016, versus $754.2 million at year-end 2015; restricted cash was $22.4 million.
- Operating activities used $64.1 million, compared with $25.4 million used in Q1 2015. The 2016 use primarily reflected a $381.9 million inventory increase from land investment and seasonal homebuilding activity.
- Investing activities used $451.8 million, mainly for the $430.0 million Wieland asset acquisition. Financing activities provided $757.3 million, principally from the senior-note issuance. Cash increased by $241.5 million during the quarter.
- At quarter end, senior notes were $2.569 billion and the term loan was $498.8 million; Financial Services debt was $118.6 million. Debt to total capitalization, excluding Financial Services debt, was 39.1%.
- In February, the company issued $1.0 billion of unsecured notes: $300 million at 4.25% due 2021 and $700 million at 5.50% due 2026. Proceeds were intended in part to retire $465.2 million of notes maturing in May 2016; remaining proceeds were for general corporate purposes.
- The $500 million revolving credit facility had no borrowings outstanding and $213.4 million of letters of credit. The company reported compliance with its facility and term-loan covenants. The $500 million term loan initially matures in January 2017, with an option to extend up to 12 months.
- The company declared $31.5 million in dividends and repurchased 3.1 million shares for $50.0 million. Repurchase authorization remaining was $554.8 million.
Material changes, outlook and risks
- Wieland acquisition: In January, PulteGroup acquired substantially all assets of JW Homes for approximately $430 million in cash, plus certain assumed payables. The assets included approximately 7,000 lots, control of about 1,300 additional lots through options, and a 317-home order backlog. The provisional purchase accounting included $38.3 million of goodwill and $18.0 million of tradename intangibles. The acquisition contributed to Southeast growth; transaction and integration costs affected results.
- Demand and operating plans: Management described the housing recovery as sustained but slow, supported by economic and demographic factors, low rates and limited new-home supply. It called the start to 2016 strong, cited 24% growth in net new order dollars and a 31% increase in backlog dollars, and expects elevated community openings during 2016. No specific full-year earnings or revenue guidance was provided.
- Margins and inventory: Wieland-related fair-value adjustments contributed about 80 basis points to the year-over-year gross-margin decline. Higher construction and land costs also offset favorable factors. The company reported 41% more homes in production year over year, including more speculative homes, and said it expects spec starts to moderate over the year. Entitlement and land-development delays may challenge new community openings.
- Commitments and contingencies: Land-option agreements carried $2.3 billion of remaining purchase price, supported by $183.0 million in deposits and pre-acquisition costs. Outstanding letters of credit were $213.4 million and surety bonds approximately $1.1 billion. The company did not expect a material amount of these instruments to be drawn.
- Insurance and legal exposures: Self-insured and insurance-program reserves were $693.0 million, largely for general-liability claims; estimates, particularly incurred-but-not-reported claims, are uncertain. Insurance receivables were $135.8 million, and PulteGroup is litigating with insurers over a large portion of the balance. Management said resolution of legal and regulatory matters was not expected to materially harm results, but noted losses could exceed recorded reserves.
- Other risks and events: The filing highlights sensitivity to mortgage rates, financing availability, land and construction costs, labor, regulation, economic conditions and claims. CEO Richard J. Dugas, Jr. informed the board of his intention to retire at the 2017 annual meeting; a board committee began a successor search. Management cautioned that interim and seasonal results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether order and backlog growth converts into closings without further deterioration in gross margin; the cancellation rate rose to 13% from 11%.
- How Wieland integration, acquisition-related costs and acquired-home fair-value adjustments affect subsequent-period margins and cash generation.
- Whether inventory investment and land commitments remain aligned with demand, and how operating cash flow develops after the seasonal build.
- Execution of the May 2016 note retirement and management of the January 2017 term-loan maturity, alongside covenant compliance and leverage.
- Development of construction-defect claims, insurance recoveries and related litigation, as well as changes in deferred tax assets and unrecognized tax benefits.
- CEO succession and transition planning, and the effect of market, mortgage-rate, land, labor and regulatory conditions on the outlook.