PulteGroup, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed October 28, 2011. Financial amounts below are in U.S. dollars, generally millions. PulteGroup operates homebuilding businesses across the East, Gulf Coast and West, as well as mortgage banking and title services.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $1,141.9 | $1,057.8 | $2,874.3 | $3,384.0 |
| Pretax loss | $(202.5) | $(1,023.8) | $(301.2) | $(1,044.1) |
| Net loss | $(129.3) | $(995.1) | $(224.2) | $(931.3) |
| Diluted loss per share | $(0.34) | $(2.63) | $(0.59) | $(2.46) |
- Q3 homebuilding revenue was $1,114.0 million, up 8% year over year; home sale revenue rose 7% as settlements increased 9%, partly offset by a 1% lower average selling price ($262,000).
- Nine-month homebuilding revenue was $2,802.6 million, down 15%, primarily reflecting 14% fewer settlements and the expiration of the 2010 federal homebuyer tax credit. Average selling price declined 1% to $254,000.
- Home sale gross margin was 13.9% in Q3 and 13.0% for the nine months, versus 7.0% and 10.9%. Excluding specified land valuation adjustments, capitalized-interest amortization and merger-related costs, management-reported non-GAAP margins were 18.5% and 17.6%, respectively, versus 16.7% and 16.8%.
- Q3 net loss includes a $240.5 million goodwill impairment; the comparable 2010 quarter included $654.9 million of goodwill impairment and $272.2 million of insurance reserve adjustments. Nine-month 2011 goodwill impairment was $240.5 million, versus $656.3 million in 2010. PulteGroup had no goodwill remaining at September 30, 2011.
- Homebuilding pretax loss was $207.5 million for Q3 and $276.1 million for the nine months. Financial Services earned $8.7 million in Q3 but lost $7.0 million for the nine months.
- Homebuilding orders were nearly flat: Q3 net new orders were 3,564 units versus 3,566; nine-month orders were 12,131 versus 12,104. Backlog at quarter-end was 5,143 units worth $1.399 billion, down 4% in units year over year. Q3 cancellation rate was 21%, versus 19%.
Cash flow, balance sheet and debt
- Cash and equivalents were $1,142.5 million at September 30, down from $1,470.6 million at year-end 2010. Restricted cash was $113.3 million. Total assets were $7,228.7 million; shareholders’ equity was $1,923.5 million.
- Nine-month operating cash flow was negative $163.7 million, compared with positive $798.6 million in 2010. The 2011 use principally reflected a $174.2 million inventory increase. The prior-year inflow was principally supported by $884.6 million in net income-tax refunds/payments (refunds exceeded payments).
- Investing cash flow was negative $94.0 million, including $89.4 million moved to restricted cash for letter-of-credit collateral. Financing cash flow was negative $70.4 million, including repayment of $53.0 million of senior notes before maturity and scheduled debt repayment.
- Senior notes carrying value was $3,335.4 million, down from $3,391.7 million at year-end; estimated fair value was $2,963.1 million. The company retired $53.0 million of notes early, recording a $3.5 million loss. Debt-to-total-capitalization was 63.4%, or 51.9% net of cash and restricted cash.
- The company terminated its undrawn $250 million revolving facility in March, releasing $250 million previously required in liquidity reserves and eliminating associated covenants. It replaced letter-of-credit capacity through cash-collateralized agreements; $89.4 million was outstanding under those agreements and $155.3 million under a separate unsecured facility at quarter-end.
Changes, outlook and risks
- Results improved substantially against 2010’s unusually large goodwill and insurance charges, but the company remained loss-making. Lower nine-month revenue and negative operating cash flow indicate continuing pressure despite stronger reported homebuilding margins.
- Management described housing demand as weak and the near-term outlook, including the remainder of 2011 and 2012, as cautious; it did not provide numerical earnings or revenue guidance. Management said a sustainable recovery’s timing was uncertain and visibility into future earnings was limited.
- Management cited near-historically-low industry volumes, unemployment and weak consumer confidence, foreclosures, mortgage availability and costs, possible higher rates, regulatory changes, and market-specific volatility. It was reducing overhead, tailoring products toward affordability, managing land positions selectively, and shifting toward pre-selling homes. It did not expect a broad near-term recovery.
- Land and community valuation charges were $4.9 million for the first nine months, compared with $87.5 million in 2010. Management cautioned that weaker markets or changed plans could require significant future impairments. The company held $4.890 billion of house and land inventory.
- Material estimates and contingencies include $793.6 million of self-insurance reserves, largely for general-liability claims; $94.7 million of mortgage-loan repurchase and make-whole liabilities; and $68.8 million of warranty liabilities. Management said actual insurance and mortgage-claim losses could exceed estimates.
- Deferred tax assets of approximately $2.5 billion were fully offset by a valuation allowance. Tax benefits recorded in the periods primarily reflected favorable resolutions of federal and state tax matters. The company was under IRS and state examinations and said the outcomes were not yet determinable.
- Two securities lawsuits against a bank concern RMBS transactions that included $162 million of Centex-originated loans; PulteGroup and the Centex mortgage subsidiary were not named defendants. Potential indemnification exposure was not quantifiable. Management did not expect a material adverse impact.
Important facts for investors to verify
- Whether home orders, settlements, cancellation rates and backlog value support stabilization, particularly given regional weakness and reduced active communities.
- Whether operating cash use, inventory investment and restricted-cash requirements remain manageable relative to available cash and debt maturities.
- Whether the assumptions underlying the $793.6 million insurance reserve and $94.7 million mortgage repurchase liability remain adequate as claims develop.
- Whether inventory and land valuations withstand changes in local market conditions, selling prices, sales pace, development costs and discount-rate assumptions.
- Potential effects of tax examinations, the fully reserved deferred tax assets, and disclosed litigation or other contingent obligations.