PulteGroup, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. PulteGroup is a U.S. homebuilder operating across 48 markets in 27 states, with mortgage and title services supporting its homebuilding business.
Financial and operating performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Consolidated revenue | $5.680 billion | $4.820 billion |
| Income before income taxes | $527.8 million | $183.6 million |
| Net income | $2.620 billion | $206.1 million |
| Diluted EPS | $6.72 | $0.54 |
| Cash from operating activities | $881.1 million | $760.1 million |
| Home sale gross margin | 20.5% | 15.8% |
| Home closings | 17,766 | 16,505 |
| Average selling price | $305,000 | $276,000 |
| Net new orders | 17,080 | 19,039 |
FY 2013 net income included a $2.1 billion tax benefit from reversing substantially all of the valuation allowance on deferred tax assets. Consequently, reported net income and EPS are not representative of operating earnings alone. Pretax income increased to $527.8 million from $183.6 million; homebuilding contributed $479.1 million and Financial Services $48.7 million.
At December 31, 2013, cash and equivalents were $1.580 billion and restricted cash was $72.7 million. Senior notes totaled $2.058 billion, with an additional $105.7 million of Financial Services debt. Management reported a 30.7% debt-to-capitalization ratio excluding Financial Services debt, or 8.0% net of cash and equivalents including restricted cash. Shareholders’ equity was $4.649 billion.
Changes and notable items
- Revenue rose 18%, closings increased 8%, and average selling price rose 11% year over year. Gross margin improved 470 basis points to 20.5%; management’s adjusted, non-GAAP home sale gross margin was 25.2%, versus 20.9% in 2012.
- Net new orders fell 10%, and year-end backlog declined 11% by units to 5,772 homes, but declined only 2% by value to $1.902 billion. The company attributed lower orders to 14% fewer active communities and softer second-half demand as prices and mortgage rates increased.
- Operating cash flow was $881.1 million, supported by profitability and a $265.1 million reduction in inventories. The company retired $461.4 million of senior notes, repurchased $127.7 million of shares, reinstated a quarterly dividend, and increased land investment.
- Unusual expenses included a $41.2 million charge for a contractual dispute involving a previously completed luxury community, $26.9 million of losses on debt retirements, and $15.0 million of headquarters relocation costs recorded in SG&A.
- Fourth-quarter 2013 revenue was $1.655 billion, pretax income was $232.4 million, net income was $220.1 million, and diluted EPS was $0.57. Fourth-quarter 2012 figures were $1.567 billion, $51.2 million, $58.7 million, and $0.15, respectively.
Outlook, risks, and contingencies
Management described the housing recovery as ongoing and expected market conditions to improve over the longer term, while acknowledging uneven conditions and a second-half 2013 slowdown. It anticipated that higher mortgage rates could moderate demand and pricing. The company said it would prioritize margins, inventory turns, disciplined land investment, cost control, and limiting speculative inventory. It did not provide specific numerical revenue or earnings guidance.
- Key exposures include housing demand and prices, mortgage rates and availability, land acquisition costs, labor and material shortages or inflation, and regulatory changes affecting construction and mortgage lending.
- Self-insurance and other claim reserves totaled $668.1 million; management estimated a reasonably possible loss range of $600 million to $750 million. Warranty costs, construction-defect claims, and insurance availability remain uncertain.
- Mortgage loan origination liabilities were $125.0 million at year-end. Claims primarily relate to older loan vintages; no such loss provision was recorded in 2013, but ultimate costs could differ from estimates. Centex-related mortgage indemnity exposure also remains partly unquantified.
- Gross unrecognized tax benefits were $173.3 million, with $33.1 million of accrued interest and penalties; tax examinations were ongoing. Realization of deferred tax assets depends on future taxable income and remains subject to reassessment.
- Outstanding letters of credit were $183.1 million and surety bonds were $958.3 million. The company stated it did not expect a material amount to be called. The land option portfolio carried $1.4 billion of remaining purchase commitments, generally cancellable at the company’s discretion.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- How much of 2013’s reported earnings and balance-sheet improvement is attributable to the noncash $2.1 billion deferred-tax valuation allowance reversal, and how much reflects ongoing operations?
- Whether order trends, backlog conversion, pricing, and margins hold up amid higher mortgage rates and fewer active communities.
- The adequacy of self-insurance, warranty, mortgage repurchase, and tax reserves, including potential outcomes beyond recorded estimates.
- Debt maturities, liquidity and financing-facility renewals, and the company’s planned pace of land investment, repurchases, and dividends.
- The final costs and execution effects of the headquarters relocation, and any further developments in the luxury-community dispute.