PulteGroup, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. PulteGroup is a U.S. homebuilder operating through six homebuilding regions, with mortgage and title operations. The filing also reports unaudited fourth-quarter results.
Financial and operating results
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Consolidated revenue | $5.822 billion | $5.680 billion | Up 3% (rounded) |
| Income before taxes | $689.8 million | $527.8 million | Up 31% |
| Net income | $474.3 million | $2.620 billion | Down; 2013 included a $2.1 billion deferred-tax valuation-allowance reversal |
| Diluted EPS | $1.26 | $6.72 | Similarly affected by the 2013 tax benefit |
| Operating cash flow | $309.2 million | $881.1 million | Lower primarily as inventory investment increased |
| Home sale gross margin | 23.3% | 20.5% | Up 280 basis points |
| Year-end cash and equivalents | $1.293 billion | $1.580 billion | Restricted cash was an additional $16.4 million |
| Senior notes | $1.819 billion | $2.058 billion | Reduced by $245.7 million during 2014 |
Home sale revenue rose 4% to $5.662 billion, as an 8% increase in average selling price ($329,000) more than offset a 3% decline in closings (17,196). Net new orders fell 3% to 16,652 units; year-end backlog increased 1% to 5,850 homes, valued at $1.944 billion. The cancellation rate remained 15%.
Fourth-quarter 2014 revenue was $1.823 billion, pretax income was $267.1 million, net income was $217.1 million, and diluted EPS was $0.58. Fourth-quarter 2013 net income was $220.1 million, but that quarter included a $73.7 million deferred-tax valuation-allowance benefit.
Liquidity, debt and capital allocation
- Debt to total capitalization was 27.5%, excluding Financial Services debt. Financial Services debt was $140.2 million at year-end.
- The $500 million unsecured revolver had no borrowings outstanding; $208.4 million of letters of credit used facility capacity. The company reported compliance with its financial covenants.
- Operating cash flow was partly offset by a $346.6 million increase in inventories as investment spending rose nearly 40%. Cash used in financing was $529.1 million, including debt reduction, share repurchases and dividends.
- During 2014, PulteGroup repurchased 12.9 million shares for $245.8 million and paid $75.6 million in dividends. The quarterly dividend was raised to $0.08 in the fourth quarter; $738.5 million remained under the repurchase authorization at year-end.
- Land control totaled 130,793 lots, including 34,573 under option agreements with a remaining purchase price of $1.9 billion.
Material changes and unusual items
- Homebuilding pretax income increased 33% to $635.2 million, supported by higher selling prices, improved margins and lower amortized interest costs. SG&A rose 17% to $667.8 million, including a $69.3 million increase in general-liability insurance reserves and headquarters-relocation costs.
- Financial Services pretax income increased 12% to $54.6 million, despite revenue falling 11% to $125.6 million. Results benefited from an $18.6 million reduction in loan-origination loss reserves; management said mortgage pricing competition continued to pressure margins.
- Income tax expense was $215.4 million in 2014, versus a $2.092 billion tax benefit in 2013. The 2014 tax result included a $45.6 million benefit from reversing valuation allowances and favorable tax resolutions.
- Other notable 2014 items included $8.6 million of losses on early debt retirements and $16.3 million of headquarters-relocation costs. The relocation was expected to be substantially complete in 2015, with less than $15 million of remaining costs.
- Self-insurance reserves were $710.2 million at year-end; the company estimated a reasonably possible loss range of $650 million to $825 million. A $69.3 million reserve increase was primarily associated with estimated siding repairs in previously completed communities.
Outlook, commentary and risks
Management was optimistic about 2015 and expected a slow, sustained housing recovery, citing employment, mortgage rates, energy costs, demographics and housing supply. It planned to increase investment in land while continuing systematic dividends and repurchases. The filing provides no specific numerical earnings, revenue or margin guidance.
Key risks include housing-demand or home-price deterioration; higher mortgage rates or tighter credit; land, labor and materials availability and cost; competition and margin pressure; construction defects and insurance costs; mortgage-loan repurchase claims; regulation and tax uncertainty; and adverse weather or natural disasters. Backlog orders may be canceled, and land-option agreements can expose the company to deposits and pre-acquisition costs.
The financial statements received an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective. Their assessments excluded controls over the Dominion Homes assets acquired in August 2014.
Important facts for investors to verify
- Whether the 2014 margin improvement and higher selling prices can continue while closings and net new orders are soft.
- The adequacy and development of the $710.2 million self-insurance reserves, particularly claims tied to siding repairs.
- Future mortgage repurchase claims and whether the $58.2 million loan-origination liability proves sufficient.
- Cash generation as land and inventory investment expands, alongside debt maturities and shareholder returns.
- How much of reported earnings and deferred-tax assets depend on future taxable income and tax-audit outcomes.