PulteGroup, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars; financial figures are rounded.
Business context and reporting period
PulteGroup is a U.S. homebuilder operating in 50 markets across 26 states through Pulte Homes, Del Webb and Centex. Its core homebuilding business is supplemented by mortgage banking and title services. The filing describes a gradually improving housing market, with uneven conditions by region, and reports results for 2015 against 2014 and 2013.
Financial and operating highlights
| Metric | FY2015 | FY2014 |
|---|---|---|
| Consolidated revenue | $5.982 billion | $5.822 billion |
| Income before taxes | $816.0 million | $689.8 million |
| Net income | $494.1 million | $474.3 million |
| Diluted earnings per share | $1.36 | $1.26 |
| Home sale gross margin | 23.3% | 23.3% |
| Home closings | 17,127 | 17,196 |
| Average selling price | $338,000 | $329,000 |
| Net new orders | 18,008 units | 16,652 units |
| Year-end backlog | 6,731 units; $2.457 billion | 5,850 units; $1.944 billion |
Revenue rose 3%, while pretax income rose 18%. Home sale revenue increased 2%, mainly from higher average selling prices; closings were essentially flat as labor constraints and weather delayed production. Orders rose 8%, and the cancellation rate improved to 14% from 15%. Financial Services pretax income increased to $58.7 million from $54.6 million, supported by higher mortgage originations and capture rate (82.9%, versus 80.2%).
Fourth quarter: Consolidated revenue was $2.062 billion, versus $1.823 billion in Q4 2014; pretax income was $373.3 million versus $267.1 million; net income was $228.0 million versus $217.1 million; and diluted EPS was $0.64 versus $0.58. Q4 results included a $29.6 million general-liability reserve reversal and an $11.8 million mortgage loan-origination reserve reduction.
Cash flow, debt and liquidity
- Operating cash flow was a use of $348.1 million, compared with cash generation of $309.2 million in 2014. The principal driver was a $927.8 million inventory increase as the company stepped up land investment and built homes to support backlog and planned production.
- Cash and equivalents ended the year at $754.2 million, down from $1.293 billion. Restricted cash was $21.3 million. The company reported $308.7 million available on its $500 million revolving facility, net of letters of credit, and no revolver borrowings at year-end.
- Senior notes were $1.585 billion and a new term loan was $500 million; Financial Services debt was $267.9 million. The company’s debt-to-total-capitalization ratio, excluding Financial Services debt, was 30.5%. The term loan initially matures in January 2017, with an option to extend up to 12 months; approximately $465 million of senior notes mature in 2016.
- Financing activity included $433.7 million of share repurchases and $116.0 million of dividends paid. The quarterly dividend was raised to $0.09 per share; $604.8 million remained authorized for repurchases at year-end.
Changes, outlook, risks and unusual items
- Management expected housing demand to improve gradually, supported by employment, household formation and low mortgage rates, but noted that recovery would vary by market. It expected more community openings in 2016 and anticipated volume growth; these are forward-looking expectations, not guarantees.
- In January 2016, PulteGroup acquired substantially all JW Homes assets, including the John Wieland Homes and Neighborhoods brand, for approximately $430 million in cash, subject to certain assumed payables. Management said the acquisition was not expected to materially affect results or financial condition.
- Net homebuilding results included a $62.2 million general-liability insurance reserve reversal in 2015, compared with a $69.3 million reserve charge in 2014. A $20 million Applecross jury award was reserved in 2015; PulteGroup said it planned to pursue post-trial relief and, if unsuccessful, appeal. The company also reported $11.5 million of land-related charges in 2015.
- Key risks include housing and mortgage-market weakness, higher interest rates or tighter mortgage availability, land availability and valuation, labor and material cost pressures, construction delays, warranty and construction-defect claims, mortgage repurchase claims, regulatory changes, severe weather, and the realization of deferred tax assets. The company reported $692.1 million of self-insurance reserves and estimated reasonably possible losses of $625 million to $800 million; actual claims may differ from estimates.
- The 2013 comparison is distorted by a $2.1 billion deferred-tax valuation-allowance reversal, which drove reported net income to $2.620 billion. It should not be read as a comparable level of recurring earnings.
Important facts for investors to verify
- Whether backlog converts to closings as expected, given production delays, labor constraints and the backlog’s exposure to customer cancellations.
- How increased land and inventory investment affects cash generation, inventory turns and returns on invested capital.
- The timing and repayment or extension of the 2016 senior-note maturities and the $500 million term loan.
- Developments in the Applecross appeal, construction-defect claims, insurance recoveries and the adequacy of related reserves.
- The JW Homes acquisition’s final purchase accounting, integration and contribution to 2016 operations.
- Future realization of deferred tax assets and outcomes of open tax examinations; reported tax rates and earnings have been affected by valuation-allowance changes.