PulteGroup, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. PulteGroup is a U.S. homebuilder with mortgage, title, and insurance brokerage operations. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $2,593.8 | $2,489.0 | $4,888.8 | $4,485.7 |
| Income before tax | $457.0 | $320.8 | $720.8 | $537.5 |
| Net income | $348.6 | $241.0 | $552.3 | $407.8 |
| Diluted EPS | $1.29 | $0.86 | $2.03 | $1.45 |
| Operating cash flow | Not provided by quarter | $807.9 | $305.7 |
- Q2 revenue increased 4% and net income increased 45% year over year; first-half revenue rose 9% and net income 35%. First-half diluted EPS was $2.03 versus $1.45.
- Homebuilding gross margin was 23.9% in Q2 and 23.8% for the first half, up 80 and 50 basis points, respectively. SG&A was 8.0% of home-sale revenue in Q2 versus 10.8% a year earlier.
- Home-sale revenue rose 3% in Q2, reflecting 6% more closings partly offset by a 3% lower average selling price. First-half home-sale revenue rose 8%; closings increased 11% and average selling price declined 3%.
- Financial Services revenue increased 69% in Q2 to $94.8 million; pretax income increased 141% to $60.4 million. Management cited higher loan volume, improved capture rate and margin per loan, and lower mortgage rates.
- Cash, cash equivalents, and restricted cash totaled $1,697.8 million at June 30, including $1,658.5 million of cash and equivalents. First-half operating cash flow improved from $305.7 million to $807.9 million, supported by earnings, lower inventory investment, and a seasonal reduction in mortgage loans held for sale.
- Notes payable were $2,770.6 million and Financial Services debt was $256.4 million. The company reported a 32.1% debt-to-capitalization ratio, excluding Financial Services debt, versus 33.6% at year-end 2019. It had $755.2 million available under its revolving facility, net of letters of credit, and reported compliance with covenants.
Material changes and operating trends
- Demand weakened sharply during the pandemic: net new orders were 11% below prior year in March and 53% below in April. Orders stabilized in May and rose 50% year over year in June. Q2 orders were down 4% in units and 7% in dollars, while first-half orders increased 6% in both units and dollars.
- June 30 backlog was 13,214 homes, up 12%, with backlog value of $5,788.1 million, up 13%. Q2 cancellation rate rose to 19% from 14% a year earlier.
- Management restricted speculative construction and land spending in response to uncertainty, then began increasing speculative production as demand recovered. Inventory was $7,584.7 million, down from $7,680.6 million at December 31, 2019.
- The company drew $700 million on its revolver in March as a precaution and repaid the full amount in June. Share repurchases were suspended in March and remained suspended through Q2.
Outlook, risks, and unusual items
- The filing provides no numerical earnings or operating guidance. Management said operations were functioning at effectively full capacity, subject to safety restrictions, but cautioned that a COVID-19 resurgence could again disrupt activity. It said the duration and economic effects of the pandemic were uncertain.
- Q2 and first-half results included general-liability insurance reserve reversals of $60.7 million and $59.4 million, respectively, based on claims experience below prior actuarial estimates. These releases materially benefited SG&A and earnings. Q2 also included $10.3 million of severance expense; first-half results included a $20.2 million goodwill impairment related to the ICG acquisition.
- The January acquisition of Innovative Construction Group cost $104.0 million, including $83.3 million paid in January; additional payments of $10.4 million are due in each of 2021 and 2022.
- Key risks include renewed COVID-related operating constraints and weaker housing demand, cancellations, unemployment and reduced consumer confidence, higher construction or land costs, labor and materials availability, mortgage-rate and financing changes, and potential inventory impairments or land-option write-offs.
- Land options carried $3.5 billion of remaining purchase commitments and $301.4 million of deposits and pre-acquisition costs. Surety bonds were approximately $1.3 billion. General-liability reserves were $640.0 million; mortgage-related claim reserves were $25.3 million. Management cautioned that actual claims and reserve outcomes could differ from estimates.
- Pulte Mortgage’s $270 million repurchase agreement matured July 30, 2020, shortly after the filing date; $256.4 million was outstanding at June 30. Management said it believed liquidity was adequate but gave no assurance of renewal or replacement on commercially reasonable terms.
Important facts for investors to verify
- Whether June’s order rebound continued, and how backlog conversions, cancellations, and margins developed after quarter-end.
- How much reported earnings depended on insurance reserve releases, and whether further favorable or adverse reserve revisions are likely.
- The renewal or replacement terms of the mortgage repurchase agreement that matured July 30, 2020.
- Any subsequent changes in COVID-related restrictions, homebuyer demand, construction capacity, land commitments, or liquidity.