PulteGroup, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. PulteGroup is a U.S. homebuilder with mortgage and title operations. Financial amounts below are in U.S. dollars; millions unless otherwise noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $1,594.7 | $1,582.1 | $3,999.8 | $4,024.3 |
| Income before taxes | $224.9 | $174.7 | $422.6 | $295.4 |
| Net income | $140.5 | $2,281.9 | $257.2 | $2,400.1 |
| Diluted earnings per share | $0.37 | $5.87 | $0.67 | $6.14 |
| Homebuilding gross margin on home sales | 22.9% | 20.9% | 23.4% | 19.4% |
- Home sale revenue rose 4% in Q3 and 2% for the first nine months. Average selling prices increased 8% and 10%, respectively, while closings fell 4% and 7%.
- Homebuilding pretax income increased 31% in Q3 to $214.1 million and 50% for nine months to $381.1 million. Financial Services pretax income was $10.9 million in Q3 and $41.6 million for nine months.
- Q3 net new orders were flat at 3,779 homes; nine-month orders declined 3% to 13,420. September backlog was 7,934 homes, up 5% by units and 8% by value year over year, to $2.62 billion. Cancellation rates were 18% for Q3 and 14% for nine months.
- Operating cash flow was $201.8 million for nine months, versus $555.0 million in 2013. Inventory growth used $384.6 million of cash, reflecting seasonal construction needs and increased land investment. Cash and equivalents fell to $1.22 billion from $1.58 billion at year-end.
- At September 30, senior notes were $1.82 billion and Financial Services debt was $71.6 million. The company reported a 27.8% debt-to-capitalization ratio excluding Financial Services borrowings and said it was in compliance with revolving-credit covenants.
- Shareholders’ equity was $4.71 billion. The company declared $0.15 per share in dividends during the first nine months and repurchased 7.7 million shares for $147.8 million.
Changes, outlook, and management commentary
- Prior-year earnings are not comparable without accounting for the $2.1 billion deferred-tax valuation-allowance reversal recorded in Q3 2013. That benefit drove the unusually high 2013 net income; 2014’s tax rate approximated the blended statutory rate.
- Gross-margin improvement reflected better pricing, pricing and cost-reduction initiatives, and lower amortized interest costs. For nine months, SG&A increased 25%, primarily due to an $84.5 million increase in general-liability insurance reserves. The reserve adjustment related mainly to estimated siding-repair costs and affected future-claim estimates.
- Management described overall 2014 housing demand as relatively stable and said orders per active community improved. It expects mortgage-rate increases could moderate demand and pricing, while expressing confidence in a continued, broad U.S. housing recovery. No specific earnings or revenue guidance was provided.
- Management intends to prioritize disciplined investment in land and the business, control unsold speculative homes, and return excess capital through dividends and repurchases. In October, the board raised the quarterly dividend to $0.08 per share and increased repurchase authorization by $750 million.
- In August, PulteGroup acquired Dominion Homes real-estate assets for $82.7 million in cash plus assumed payables, adding approximately 8,200 lots and a 622-home order backlog. The filing said the acquisition was not material to reported results or financial condition.
- A new $500 million unsecured revolving facility matures in July 2017 and has an uncommitted option to expand to $1.0 billion. Letters of credit of $195.5 million were outstanding under it at quarter-end. The mortgage repurchase agreement had $71.6 million outstanding and was scheduled to expire in September 2015.
Risks, contingencies, and unusual items
- Recorded reserves for insurance and other claims were $734.7 million, with management estimating reasonably possible losses of $700 million to $850 million. The majority relates to general-liability claims; actual costs could differ materially because claims are long-tail and estimates rely on actuarial assumptions.
- Mortgage-loan repurchase liabilities stood at $60.7 million, down from $125.0 million at year-end after an $18.6 million reserve reduction and payments. The company noted uncertainty in the ultimate resolution and cost of claims. Certain Centex mortgage-related indemnity exposure remains unquantified.
- Outstanding letters of credit totaled $205.8 million and surety bonds $975.9 million. The company did not expect a material amount to be called. Land-option agreements carried $1.7 billion of remaining purchase price, generally cancellable at the company’s discretion.
- Management cited risks from higher mortgage rates, land and construction costs, labor availability, insurance costs and coverage, mortgage-lending standards, competition, local market conditions, and legal or regulatory matters. Inflation or inability to pass cost increases to buyers could pressure margins and earnings.
- Other notable items included $8.6 million of losses on early debt retirements in the first nine months and $7.1 million of headquarters-relocation costs. No significant land impairments were reported.
Key facts for investors to verify
- How home orders, closings, backlog, and pricing develop across regions, particularly continued weakness in the Northeast and Southwest.
- Whether improved homebuilding margins can be sustained as land, materials, labor, and mortgage rates change.
- The adequacy and sensitivity of the $734.7 million claims reserve, including the siding-related estimates and insurance recoveries.
- Cash-flow conversion as inventory and land investment rise, and liquidity available after letters of credit and other commitments.
- The impact of mortgage competition on Financial Services profitability and the eventual resolution of mortgage repurchase and indemnity exposures.
- How the expanded share-repurchase authorization and higher dividend balance shareholder returns against land and business investment.