PulteGroup, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited results; comparisons are with the three months ended March 31, 2018 unless noted. PulteGroup is a U.S. homebuilder with mortgage, title, and insurance brokerage operations.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1,996.7 million | $1,970.1 million | Up 1% |
| Homebuilding revenue | $1,952.8 million | $1,924.2 million | Up 1% |
| Income before tax | $216.7 million | $224.2 million | Down 3% |
| Net income | $166.8 million | $170.8 million | Down 2% |
| Diluted EPS | $0.59 | $0.59 | Unchanged |
| Operating cash flow | $158.9 million | $169.0 million | Down $10.1 million |
Home-sale gross margin was 23.4%, versus 23.6%; SG&A was 13.0% of home-sale revenue, versus 12.6%. The effective tax rate declined to 23.0% from 23.8%, primarily due to favorable resolution of state tax matters. The declared dividend was $0.11 per share, compared with $0.09.
Liquidity, debt, and cash flow
- Cash and equivalents were $1.055 billion at March 31; restricted cash was $25.5 million. Combined cash, cash equivalents, and restricted cash totaled $1.081 billion, down from $1.134 billion at year-end 2018.
- Notes payable totaled $3.024 billion, including approximately $3.0 billion of senior notes. Financial Services debt was $222.1 million. The company reported a 38.0% debt-to-total-capitalization ratio excluding Financial Services debt.
- No revolving-credit borrowings were outstanding. Net availability under the $1.0 billion facility, after letters of credit, was $767.1 million; the facility matures in June 2023. The company reported covenant compliance.
- Operating cash flow was supported by net income and a seasonal $134.2 million decline in mortgage loans held for sale, and partly offset by a $259.9 million inventory increase. Financing activities used $194.6 million, including dividends, share repurchases, and seasonal repayments of Financial Services borrowings.
Operating changes and management commentary
- Closings were essentially flat at 4,635 homes; average selling price rose 2% to $421,000. Home-sale revenue increased 2%.
- Net new orders fell 6% to 6,463 homes, and ending backlog fell 6% in units and 7% in dollars to 10,550 homes and $4.622 billion. The company attributed weaker orders to industry softness that began in Q2 2018; the cancellation rate remained 12%.
- Regional results were mixed: Florida revenue rose 16% and Texas rose 10%; Northeast fell 17%, West fell 3%, and Midwest fell 1%. Management cited softer demand in several markets.
- Financial Services revenue declined 5% and pretax income declined 10%, largely reflecting competitive mortgage pricing, partly offset by slightly higher production. Mortgage originations were 2,998 loans; capture rate improved to 79.7% from 77.7%.
- Management described demand as more challenging amid affordability concerns from home prices and higher mortgage rates, while noting increased community traffic as rates eased. It cited economic and employment conditions and limited land and labor supply as support for housing demand, and expressed a positive view of the housing cycle. No specific financial guidance was provided.
- Homes in production rose 4% year over year, including more unsold homes under construction; management said this reflected a strategic decision to support supplier access and prepare communities for spring selling.
Risks, contingencies, and unusual items
- Homebuilding risks include demand and affordability, interest rates, land and construction costs, labor availability, insurance costs, and seasonal working-capital needs. Management cautioned that quarterly results may not indicate full-year results.
- Self-insured and insurance-related reserves were $729.2 million at March 31, down from $737.0 million at year-end. These estimates, largely for general-liability claims, depend on actuarial assumptions and may change; related insurance receivables were $128.0 million. The company wrote off $11.6 million of insurance receivables following an arbitration settlement.
- CTX Mortgage faces a Lehman Brothers claim alleging up to $261 million of indemnifiable losses relating to pre-2009 loans. The company says it has meritorious defenses and has recorded its best estimate of the liability; the filing does not state that reserve separately. Management says other identified litigation and regulatory matters are not expected to have a material adverse impact, but outcomes remain uncertain.
- Outstanding letters of credit were $232.9 million and surety bonds approximately $1.3 billion. The company said it did not expect a material amount, if any, to be drawn.
- Land option agreements had $2.635 billion of remaining purchase price and $238.3 million in deposits and pre-acquisition costs, of which $14.6 million was refundable. The company generally may cancel these agreements, subject to potential loss of deposits and costs.
- The Financial Services repurchase agreement, with $222.1 million outstanding and a $350 million commitment, matures in August 2019. The filing reports covenant compliance at quarter-end.
- Adoption of the new lease standard had no impact on retained earnings; it resulted in $73.3 million of right-of-use assets and $98.5 million of lease liabilities at March 31.
Investor facts to verify
- Whether order and backlog declines stabilize, particularly in Northeast, Southeast, and West markets, and how spring traffic converts to sales.
- Whether home-sale margins hold amid increased discounts, cost pressure, and a 20-basis-point year-over-year margin decline.
- The adequacy and development of self-insurance reserves, insurance recoveries, and the Lehman mortgage litigation exposure.
- Liquidity and refinancing plans for the Financial Services repurchase agreement due August 2019, alongside the company’s land spending and inventory build.
- Future cash returns: the company repurchased 0.9 million shares for $25.0 million under its authorization and had $274.9 million of authorization remaining at quarter-end.