PulteGroup, Inc. — Q1 2015 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2015. PulteGroup is a U.S. homebuilder operating across six homebuilding segments, with mortgage banking and title services through its Financial Services business. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Total revenue | $1,133.3 | $1,118.9 |
| Income before taxes | $95.8 | $130.0 |
| Net income | $55.0 | $74.8 |
| Diluted EPS | $0.15 | $0.19 |
| Cash from operating activities | $(25.4) | $91.4 |
| Cash and equivalents, March 31 | $1,053.9 | $1,292.9 at Dec. 31, 2014 |
| House and land inventory, March 31 | $4,633.1 | $4,392.1 at Dec. 31, 2014 |
| Senior notes, carrying value, March 31 | $1,820.1 | $1,818.6 at Dec. 31, 2014 |
Home sale revenue was $1,088.2 million, essentially flat year over year. Home sale gross margin was 22.7%, down 1.1 percentage points from 23.8%. SG&A was $161.3 million, or 14.8% of home sale revenue, versus 13.3%. Homebuilding pretax income was $90.7 million, down from $108.4 million. Financial Services pretax income was $5.1 million, versus $21.6 million.
Home closings were 3,365, down 2%; average selling price increased 2% to $323,000. Net new orders rose 6% to 5,139 homes, with an 11% cancellation rate versus 12%. Backlog increased 6% to 7,624 homes valued at $2,564.1 million.
Cash used in investing activities was $9.9 million and cash used in financing activities was $203.7 million. Financing outflows included $99.6 million of share repurchases, $29.6 million of dividends paid and $72.7 million of net repayments under the mortgage repurchase agreement. The company reported a 27.7% debt-to-total-capitalization ratio, excluding Financial Services debt. Its $500 million revolving credit facility had no borrowings outstanding; $193.4 million of letters of credit were issued, and the company was in covenant compliance. Financial Services debt was $67.6 million.
Material changes versus the prior comparable period
- Revenue increased about 1%, but pretax income fell about 26% and net income about 27%; diluted EPS declined from $0.19 to $0.15.
- Homebuilding earnings were pressured by lower gross margins and higher overhead despite broadly similar home sale volume. Management cited higher land, labor and materials costs, community mix, increased staffing and systems investment, and costs related to planned community openings.
- Financial Services earnings were lower largely because Q1 2014 included an $18.6 million reduction in loan-origination liabilities. Q1 2015 Financial Services revenue rose 11%; the prior-period reserve adjustment makes the earnings comparison less representative of underlying operations.
- Operating cash flow shifted from positive $91.4 million to negative $25.4 million, primarily as inventory investment increased $231.0 million. Inventory rose $240.9 million from year-end.
- Home sale gross margin declined 110 basis points. Lower amortized interest costs partially offset other margin pressure.
- Q1 2015 had no debt-retirement loss; Q1 2014 included an $8.6 million loss on debt retirements.
Outlook, commentary, risks and unusual items
Management described housing demand as improving but recovering slowly, supported by employment, demographics, low mortgage rates and limited available-home inventory. It reported a strong start to the spring selling season and expected to open approximately 200 communities in 2015 while operating roughly 600–620 communities. Management remained optimistic about 2015, emphasizing construction and asset efficiency, growth investment and shareholder returns; the filing provides no numerical earnings or revenue guidance.
Management cautioned that new community openings may be affected by entitlement and land-development delays, difficult weather and labor constraints. Other cited risks include mortgage availability and interest rates, land and construction costs, competition, regulation, insurance availability, mortgage-loan repurchase exposure, economic and housing-market conditions, and litigation. Higher costs or mortgage rates could reduce affordability, margins and earnings. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Land option agreements carried $2.0 billion of remaining purchase price, supported by $134.0 million of deposits and pre-acquisition costs. Outstanding letters of credit were $193.4 million and surety bonds approximately $1.0 billion; management did not expect a material amount to be drawn. Mortgage loan-origination liabilities were $58.2 million. Self-insured and other recorded claims reserves were $720.8 million, primarily for general liability claims; actual costs could differ materially from estimates. The company also disclosed potential indemnification obligations tied to certain legacy mortgage-backed securities transactions, but said it could not quantify potential liability and did not expect a material adverse impact. Deferred tax asset realization depends on future taxable income and remains subject to management estimates.
Important facts for investors to verify
- The company’s ability to refinance or repay the $237.3 million carrying value of senior notes due June 2015, and any subsequent changes to its debt or liquidity position.
- Whether order growth and backlog convert to closings and operating cash flow, particularly given the inventory build and planned community openings.
- Whether gross margins recover or remain pressured by land, labor, materials and community mix, and whether higher SG&A is absorbed by increased volume.
- The assumptions and adequacy of loan-origination, warranty, self-insurance and litigation reserves, including the legacy RMBS indemnification exposure.
- Land-option purchase commitments, community-opening and development progress, and the continuing availability of mortgage financing at affordable rates.