Business Context and Reporting Period
Pulte Homes, Inc. (Pulte) is a publicly-held holding company engaged in homebuilding and financial services. The reporting period covers the fiscal year ended December 31, 2009. A material event during this period was the completion of the acquisition of Centex Corporation on August 18, 2009, which became a wholly-owned subsidiary. Pulte operates in 69 markets across 29 states, offering homes through brands including Pulte Homes, Del Webb, Centex, Fox & Jacobs, and DiVosta. The company also operates a financial services segment providing mortgage banking and title services.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $4.08 billion | $6.26 billion |
| Net Loss | $(1.18) billion | $(1.47) billion |
| Loss Per Share (Basic & Diluted) | $(3.94) | $(5.81) |
| Homebuilding Unit Settlements | 15,013 | 21,022 |
| Average Unit Selling Price | $258,000 | $284,000 |
| Ending Backlog (Units) | 5,931 | 2,174 |
| Ending Backlog (Value) | $1.6 billion | $631.0 million |
| Cash and Equivalents | $1.86 billion | $1.66 billion |
| Total Senior Notes Outstanding | $4.28 billion | $3.17 billion |
| Shareholders' Equity | $3.19 billion | $2.84 billion |
Homebuilding Gross Profit Margin: Negative 10.5% in 2009 (compared to negative 10.1% in 2008), driven by significant land and community valuation adjustments.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 35% from 2008, primarily due to a 29% drop in unit settlements and a 9% decrease in average selling prices. Home sale revenues fell to $3.87 billion.
- Improved Net Loss: Despite continued industry downturn, the net loss improved by approximately $290 million compared to 2008. This improvement was largely due to a significant income tax benefit of $792.6 million resulting from the Worker, Homeownership, and Business Assistance Act of 2009, which allowed for a five-year carryback of net operating losses.
- Asset Impairments: The company recorded $973.3 million in land-related charges and $563.0 million in goodwill impairments in 2009. The goodwill impairment was primarily driven by the decline in market capitalization following the Centex merger.
- Backlog Growth: Ending backlog increased significantly to 5,931 units ($1.6 billion) from 2,174 units ($631 million) in 2008, largely attributable to the inclusion of Centex's backlog.
- Debt Structure: Senior notes increased to $4.28 billion due to the assumption of Centex debt, offset by the repurchase of $1.5 billion of senior notes during a tender offer in September 2009.
Guidance, Outlook, and Risks
Outlook: Management expects difficult market conditions to continue impacting the business in the near term. Factors cited include high foreclosure activity, elevated unemployment, the expiration of the homebuyer tax credit in April 2010, and potential increases in mortgage interest rates. The company is focusing on lean operating goals, reducing overhead, and building smaller, more affordable homes.
Liquidity: As of December 31, 2009, Pulte held $1.86 billion in cash and equivalents with no borrowings outstanding under its unsecured revolving credit facility. The company expects to receive significant federal tax refunds (approximately $867 million) in the first half of 2010.
Key Risks:
- Credit Facility Covenants: The company was not in compliance with the tangible net worth covenant as of September 30, 2009, but obtained a waiver and amended the facility in December 2009. Future deterioration in market conditions or additional asset impairments could trigger covenant violations.
- Asset Impairments: Continued volatility in the housing market may necessitate further land valuation adjustments and goodwill impairments.
- Financial Services Losses: The mortgage segment incurred a loss of $55.0 million in 2009, driven by reduced loan origination volume and a significant increase in loan loss provisions ($60.9 million related to repurchase obligations).
- Interest Rate Risk: Rising interest rates could reduce home affordability and demand.
Investor Verification Checklist
- Tax Refund Realization: Verify the timing and receipt of the expected $867 million federal tax refund from the 2009 net operating loss carryback.
- Covenant Compliance: Monitor the company's ability to maintain compliance with the amended debt covenants, specifically the debt-to-tangible capital ratio and tangible net worth requirements.
- Backlog Conversion: Assess the conversion rate of the $1.6 billion backlog into 2010 revenues, considering the high cancellation rates (23% in 2009) observed in the industry.
- Further Impairments: Evaluate the risk of additional land valuation adjustments or goodwill impairments if market conditions do not stabilize.
- Mortgage Loss Provisions: Review the adequacy of loan loss reserves and repurchase obligations in the Financial Services segment given the high level of defaults.