PulteGroup, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; the filing also reports quarterly results. PulteGroup is a U.S. homebuilder with mortgage and title operations. Centex, acquired in August 2009, is included for all of 2010 but only from the acquisition date in 2009.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Consolidated revenue | $4.57 billion | $4.08 billion |
| Loss before income taxes | $1.23 billion | $1.98 billion |
| Net loss / diluted loss per share | $1.10 billion / $2.90 | $1.18 billion / $3.94 |
| Home sale revenue | $4.42 billion | $3.87 billion |
| Homebuilding gross margin on home sales | 9.4% | (10.5)% |
| Operating cash flow | $580 million | $739 million |
| Cash and equivalents at year-end | $1.47 billion | $1.86 billion |
| Senior notes at year-end | $3.39 billion | $4.28 billion |
Reported homebuilding margin improved substantially, reflecting much lower land and community valuation adjustments. Excluding those adjustments, capitalized-interest amortization, and merger-related costs, management reported a non-GAAP home-sale margin of 16.7%, versus 12.3% in 2009. This measure is not a substitute for GAAP results.
Settlements increased 14% to 17,095 homes, while the average selling price was nearly unchanged at $259,000. Net new orders rose 7% to 15,148 units; cancellations fell to 19% from 23%. Year-end backlog declined to $1.06 billion and 3,984 units from $1.58 billion and 5,931 units.
Financial Services reported $5.6 million of pretax income, compared with a $55.0 million loss in 2009. Mortgage originations were 10,770 loans, approximately level with 2009; the capture rate fell to 78% from 85%.
Material changes and unusual items
- Consolidated revenue increased 12%, but the comparison is affected by Centex being included for a longer period in 2010. Management said combined-company home-sale revenue, settlements, and net orders declined 19%, 22%, and 28%, respectively, versus the combined 2009 comparison.
- Land-related charges fell to $216 million from $973 million. Goodwill impairment charges were $656 million, following $563 million in 2009; $240.5 million of goodwill remained at year-end, with $228 million identified as at increased risk of future impairment.
- The company recorded $280.4 million of additional insurance-related charges, principally for construction-defect claims. Self-insurance reserves increased to $813.8 million from $566.7 million.
- Operating cash flow included $934.7 million of federal tax refunds. Excluding those refunds, operating cash flow was negative by approximately $354 million. Cash declined as the company repaid debt and funded other uses.
- The company retired $898.5 million of senior notes in the fourth quarter and reported $3.39 billion of senior notes remaining. It recorded a $38.9 million loss on debt retirements for the year.
- Fourth-quarter consolidated net loss was $165.4 million. The filing reports a $654.9 million goodwill impairment in the third quarter and an $11.4 million insurance-reserve recovery in the fourth quarter.
Liquidity, outlook, and risks
At year-end, PulteGroup had $1.47 billion in cash and no borrowings under its revolving credit facility. The facility’s stated capacity had been reduced to $250 million; after $221.6 million of facility letters of credit, remaining availability was $28.4 million. The company also maintained $250 million in liquidity reserve accounts. Debt to total capitalization was 61.4%, or 47.4% net of cash.
The company was compliant with its credit-facility covenants at December 31, 2010, but its debt-to-tangible-capital ratio was 57.5% against a 60% limit. The filing says the limit tightens to 57.5% in March and June 2011 and 55% thereafter, and management believed action might be needed as early as March 31, 2011. An uncured covenant breach could accelerate facility obligations and potentially trigger a default under senior notes. Management discussed negotiating covenant changes, replacing or terminating the facility, or arranging alternative letter-of-credit capacity; no outcome was assured.
Management described signs of stabilization in some markets but said a sustainable recovery’s timing was uncertain and visibility into future earnings was limited. It expected difficult conditions to continue in the near term and said the late-2010 restructuring and completed merger integration were expected to reduce SG&A costs in 2011. No specific earnings or revenue guidance was provided. Risks cited include unemployment, foreclosures, mortgage availability and rates, home-price competition, further land or goodwill impairments, construction-defect claims, mortgage-loan repurchase demands, and regulatory changes.
Other exposures include $93.1 million of mortgage loan-origination liabilities, which the company said could prove insufficient; $709.5 million of land-option purchase commitments; and substantial letters of credit and surety bonds. A joint-venture completion-guaranty dispute carried a stated approximate proportionate exposure of $52.2 million, subject to litigation and the company’s defenses. The company said pending legal matters were not expected to have a material adverse effect, while noting outcomes could exceed reserves.
Most important facts for investors to verify
- Confirm the credit-facility covenant calculations, the March 2011 compliance thresholds, and any subsequent lender amendments or replacement financing.
- Assess the sustainability of operating cash flow excluding the $934.7 million tax refunds and the company’s remaining cash after debt service and required reserves.
- Review the assumptions underlying the $813.8 million self-insurance reserve and the $93.1 million mortgage repurchase liability, including subsequent claims and settlements.
- Evaluate the valuation assumptions for land inventory and goodwill, including the $228 million of goodwill identified as at increased impairment risk.
- Reconcile the backlog-unit figures: the filing gives 3,984 units in its selected data and segment tables, but one MD&A passage states 3,964 units.
Audit: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2010.