Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009 for Pulte Homes, Inc. (now PulteGroup, Inc.). The reporting period is significantly impacted by the completion of the merger with Centex Corporation on August 18, 2009. Consequently, Centex's results are included in the consolidated financial statements from the merger date. The company operates in a challenging homebuilding environment characterized by weak demand, high inventory, and restrictive mortgage financing.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Total Revenues | $1,091.1 million | $2,353.6 million | $1,558.2 million | $4,619.2 million |
| Net Loss | $(361.4) million | $(1,065.7) million | $(280.4) million | $(1,134.9) million |
| Loss Per Share (Diluted) | $(1.15) | $(3.88) | $(1.11) | $(4.48) |
| Cash and Equivalents | $1,516.6 million | $1,516.6 million | $1,173.9 million | $1,173.9 million |
| Total Senior Notes | $4,279.9 million | $4,279.9 million | $3,166.3 million | $3,166.3 million |
| Operating Cash Flow (9mo) | $330.5 million | $330.5 million | $763.3 million | $763.3 million |
Homebuilding Operations: Home sale revenues were $1.05 billion for the quarter and $2.27 billion for the nine months. Unit settlements decreased 22.5% in the quarter and 43.3% for the nine months compared to the prior year. Average selling prices declined 9.9% and 10.1%, respectively.
Financial Services: Revenues were $34.3 million for the quarter and $73.6 million for the nine months. The segment reported a loss before taxes of $8.6 million and $18.7 million, respectively, driven by reduced loan origination volumes and increased loan loss provisions.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 30.0% for the quarter and 49.1% for the nine months ended September 30, 2009, compared to the prior year. This was driven by significant drops in unit settlements and average selling prices across all homebuilding segments.
- Net Loss Improvement: Despite lower revenues, the net loss for the nine months ended September 30, 2009, was $69.3 million lower than the prior year period. This improvement was primarily due to a reduction in land-related charges (impairments and write-offs), which totaled $693.3 million in 2009 compared to $1.15 billion in 2008.
- Debt Repurchases: The company incurred a loss of $47.4 million in the third quarter and $31.5 million for the nine months related to the repurchase of senior notes. Approximately $1.5 billion of senior notes were retired during a tender offer in September 2009.
- Centex Merger Impact: The acquisition added $342.4 million in revenues and a $45.5 million net loss for the period from August 19 to September 30, 2009. It also increased total senior notes by approximately $1.9 billion and added significant goodwill ($1.39 billion).
Guidance, Outlook, and Risks
Outlook: Management expects market conditions to remain challenging throughout 2009 and into 2010. The company is focusing on reducing land inventory, limiting development expenditures, and managing overhead costs. They anticipate minimal investment in new land parcels in the near term.
Legislative Impact: The enactment of the Worker, Homeownership, and Business Assistance Act of 2009 allows the company to carry back 2009 taxable losses up to five years. Management anticipates federal income tax refunds in excess of $450 million.
Liquidity and Covenants:
- The company had $1.5 billion in cash and equivalents as of September 30, 2009.
- The company was not in compliance with the tangible net worth covenant under its revolving credit facility as of September 30, 2009. A limited waiver was obtained from lenders until December 15, 2009.
- The interest coverage ratio for the twelve months ended September 30, 2009, was negative 1.51, requiring the maintenance of liquidity reserve accounts totaling $391.6 million.
Risks:
- Asset Impairments: Continued weak market conditions could necessitate further land valuation adjustments and goodwill impairments.
- Integration Risk: Failure to successfully integrate Centex operations could disrupt business and prevent realization of anticipated synergies.
- Financing: Uncertainty in capital markets may affect the ability to renew credit facilities or refinance debt on favorable terms.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the tangible net worth covenant waiver and the outcome of negotiations for a permanent amendment by December 15, 2009.
- Land Inventory Valuation: Review the assumptions used in discounted cash flow models for land impairment testing, given the volatility in housing demand.
- Centex Integration: Monitor the realization of cost synergies and the transition of Centex mortgage operations to Pulte Mortgage.
- Tax Refunds: Confirm the actual amount of federal tax refunds realized from the 2009 loss carryback provision.
- Loan Loss Provisions: Assess the adequacy of loan origination liabilities and mortgage loan allowances in light of increasing investor claims and defaults.