Business Context and Reporting Period
Company: Pulte Homes, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Pulte Homes is a publicly-held holding company engaged in homebuilding and financial services (mortgage banking and title operations). The company operates through five homebuilding segments (Atlantic Coast, Gulf Coast, Midwest, Southwest, California) and one financial services segment. The 2008 fiscal year was characterized by severe deterioration in the U.S. housing market, driven by lack of consumer confidence, tightened mortgage standards, high inventory levels, and broader economic uncertainty.
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total Revenues | $6.29 billion | $9.26 billion | $14.27 billion |
| Net Income (Loss) | $(1.47) billion | $(2.26) billion | $687.5 million |
| EPS (Basic) | $(5.81) | $(8.94) | $2.73 |
| Homebuilding Settlements (Units) | 21,022 | 27,540 | 41,487 |
| Average Selling Price | $284,000 | $322,000 | $337,000 |
| Backlog (Units) | 2,174 | 7,890 | 10,255 |
| Backlog (Value) | $631 million | $2.51 billion | $3.58 billion |
| Cash and Equivalents | $1.66 billion | $1.06 billion | $551 million |
| Total Debt (Senior Notes) | $3.17 billion | $3.48 billion | $3.54 billion |
| Shareholders' Equity | $2.84 billion | $4.32 billion | $6.58 billion |
| Homebuilding Gross Margin | -10.1% | -5.0% | 17.4% |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 32% from 2007, driven by a 24% drop in unit settlements and a 12% decrease in average selling prices.
- Loss Reduction: While the company reported a net loss of $1.47 billion in 2008, this represented an improvement over the $2.26 billion loss in 2007. The improvement was primarily due to lower land-related charges ($1.5 billion in 2008 vs. $2.2 billion in 2007) and reduced goodwill impairments ($5.0 million in 2008 vs. $370.0 million in 2007).
- Backlog Contraction: Ending backlog plummeted 72% in unit count and 75% in dollar value compared to 2007, reflecting high cancellation rates (33% in 2008) and reduced new orders.
- Inventory Reduction: House and land inventories decreased significantly to $4.20 billion in 2008 from $6.84 billion in 2007, as the company aggressively reduced land positions and speculative homes.
- Dividend Suspension: The Board of Directors discontinued the regular quarterly dividend effective in the first quarter of 2009.
Guidance, Outlook, and Risks
Management Commentary: Management expects difficult market conditions to persist throughout 2009. The company is focusing on right-sizing its land pipeline, limiting development expenditures, reducing production volumes, and managing overhead costs. Restructuring charges of $45.5 million were incurred in 2008 to reduce employee headcount and overhead.
Liquidity and Capital Resources:
- The company held $1.66 billion in cash and equivalents at year-end.
- It has a $1.2 billion unsecured revolving credit facility with $846.7 million available (after letters of credit).
- The company is subject to a borrowing base limitation due to the lack of investment-grade ratings, though it was in compliance with all covenants as of December 31, 2008.
- Management maintains liquidity reserve accounts of $393.3 million to satisfy interest coverage tests.
Risks and Contingencies:
- Asset Impairments: Significant risk of future land-related charges and write-downs if market conditions worsen or strategies change. Total land-related charges since 2006 exceed $4.3 billion.
- Financing Constraints: Volatility in capital markets could restrict access to credit or increase borrowing costs. Failure to meet credit facility covenants could trigger defaults on senior notes.
- Market Conditions: Continued weakness in consumer confidence, high unemployment, and foreclosure activity threaten future sales and pricing power.
- Legal Proceedings: The company settled an EPA consent decree regarding storm water discharge, paying a penalty of $877,000 and committing to a $608,000 environmental project.
Investor Verification Checklist
- Land Inventory Valuation: Verify the adequacy of the $1.2 billion in land and community valuation adjustments recorded in 2008 and assess the risk of further impairments given the negative gross margin.
- Covenant Compliance: Monitor the company's ability to maintain the debt-to-total capitalization ratio (49.4% at year-end vs. 55% limit) and tangible net worth requirements under its credit facility.
- Backlog Cancellations: Track the cancellation rate (33% in 2008) and its impact on the ability to convert the remaining $631 million backlog into revenue in 2009.
- Dividend Policy: Confirm the suspension of dividends and the company's cash preservation strategy in a low-revenue environment.
- Joint Venture Exposure: Review the $92 million proportionate share of joint venture debt and the potential liability from completion guaranties on defaulted projects.