PulteGroup, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise stated.
Business context and reporting period
PulteGroup is a U.S. homebuilder with mortgage banking and title operations. It reported six homebuilding segments and a Financial Services segment. The company said U.S. housing demand continued to improve, supported by job creation, low unemployment, favorable interest rates and limited new-home supply, although new-home sales remained below historical averages.
In January 2016, PulteGroup acquired substantially all assets of JW Homes (Wieland) for $430.5 million in cash, adding communities and operations in the Southeast.
Financial results and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $1,942.9 million | $1,506.7 million | $5,175.4 million | $3,920.3 million |
| Income before tax | $212.3 million | $179.3 million | $520.1 million | $442.7 million |
| Net income | $128.5 million | $107.8 million | $329.5 million | $266.1 million |
| Diluted EPS | $0.37 | $0.30 | $0.94 | $0.73 |
| Homebuilding gross margin on home sales | 21.1% | 23.6% | 21.4% | 23.2% |
- Q3 revenue rose 29% year over year; nine-month revenue rose 32%. Home sale revenue growth reflected higher closings and average selling prices, with some contribution from Wieland.
- Q3 home closings increased 16% to 5,037; average selling price increased 11% to $374,000. For the nine months, closings rose 20% to 13,754 and average selling price rose 10% to $366,000.
- Gross margin declined year over year, partly due to Wieland purchase-accounting adjustments, higher construction and land costs, and community mix. Management said margins remained strong relative to historical levels.
- SG&A was $183.0 million in Q3 and $566.4 million for the nine months. As a share of home sale revenue, it improved to 9.7% and 11.3%, respectively, from 10.9% and 11.9%.
- Financial Services pretax income increased 48% in Q3 to $21.3 million and 64% for the nine months to $48.1 million, reflecting higher origination volume and revenue per loan, as well as improved overhead leverage. Nine-month mortgage capture rate was 80.9%, versus 82.9% a year earlier.
- Operating cash flow was negative $312.2 million for the nine months, compared with negative $244.9 million in 2015. The principal use was a $1.1 billion increase in inventory, reflecting land and development investment and seasonal home production. Investing cash outflow was $469.6 million, largely due to Wieland.
- Cash and equivalents were $434.2 million at September 30, down from $754.2 million at year-end 2015; restricted cash was $27.0 million. The company reported $504.3 million available under its revolving facility.
- Total reported debt was approximately $3.27 billion, comprising $3.11 billion of senior notes and $158.8 million of Financial Services debt; the term loan had been repaid. Homebuilding debt-to-total capitalization, excluding Financial Services debt, was 40.0%. The company had no revolver borrowings and was compliant with its covenants.
- Cash dividends declared were $0.09 per share in Q3 and $0.27 per share for the nine months. The company repurchased 17.7 million shares for $347.7 million in the nine-month period.
Material changes versus the prior comparable period
- Q3 net income increased about 19% and nine-month net income about 24%; diluted EPS increased to $0.37 and $0.94, respectively.
- Backlog at September 30 rose 8% by units to 9,417 homes and 20% by dollars to $3.70 billion. Net new orders increased 17% in Q3 and 12% year to date by units; order dollars rose 25% and 23%, respectively.
- Active communities increased 16% to 709. Inventory rose to $6.95 billion from $5.45 billion at December 31, 2015, including higher homes under construction and land under development.
- Debt increased from year-end, with $2.0 billion of senior notes issued in February and July. Proceeds funded the May maturity, repayment of the term loan and general corporate purposes.
- The company amended its revolving credit facility, increasing maximum commitments from $500 million to $750 million and extending maturity to June 2019.
Outlook, management commentary, risks and unusual items
- Management described its market view as positive and aimed to combine volume growth with margin discipline and improved construction and asset efficiency. It planned to use capital for growth while returning funds to shareholders.
- Management expected amortized interest costs as a percentage of revenue to remain below 2015 levels for the rest of 2016. It expected spec-home starts to moderate over the year while maintaining inventory appropriate to local demand.
- Subject to market conditions, the company expected to repurchase $250 million of shares in Q4 2016 and $1.0 billion in 2017. Remaining authorization at September 30 was $1.3 billion.
- Unusual costs included a $15.0 million charge for settling a disputed land transaction, $10.6 million of nine-month lease-exit and related costs, and $9.1 million of severance costs. The 2016 results also included $13.0 million of deposit and pre-acquisition cost write-offs, primarily for a California project the company abandoned. Prior-year comparisons included a $20.0 million Applecross litigation reserve and a $32.6 million favorable legal-settlement reserve reversal for the nine months.
- Key risks include higher mortgage rates or reduced mortgage availability, inflation in land and construction costs, labor and land constraints, housing-market changes, regulatory or legal matters, and the ability to convert inventory investment into cash. The company disclosed $1.1 billion of surety bonds, $245.7 million of letters of credit and $2.2 billion of remaining land-option purchase commitments.
- Construction-defect and other self-insured reserves totaled $702.5 million. Related insurance receivables were $136.9 million, including $108.1 million involved in litigation with insurers; management said collection was probable but outcomes are uncertain. The company also noted uncertainty in warranty, mortgage-loan representation-and-warranty, litigation and tax exposures. No material adverse outcome was anticipated by management, but additional charges could be significant.
- Management stated that quarterly results may not indicate full-year results because of homebuilding seasonality. No specific full-year revenue or earnings guidance was provided in the filing.
Important facts for investors to verify
- Whether order and backlog growth converts into closings and cash flow, and how much growth reflects Wieland versus existing operations.
- Whether gross margins stabilize amid land and construction cost pressure and the lower-margin contribution from acquired assets.
- Inventory growth, land commitments and operating cash use relative to future demand and management’s stated investment discipline.
- Debt-service capacity and capital allocation after the 2016 note issuances, planned buybacks and dividends.
- Potential changes in the $702.5 million self-insurance reserve and the recoverability and timing of disputed insurance receivables.
- Developments in the land-transaction settlement, Applecross appeal, tax examinations and other legal or regulatory matters.