PulteGroup, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with the three months ended March 31, 2011. PulteGroup is a U.S. homebuilder with mortgage and title operations.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $881.0 million | $805.2 million |
| Homebuilding revenue | $852.2 million | $783.8 million |
| Net loss | $11.7 million | $39.5 million |
| Loss per diluted share | $0.03 | $0.10 |
| Operating cash flow | $114.7 million provided | $49.6 million used |
- Home sale gross margin was 12.5%, unchanged year over year. Adjusted home sale gross margin, a non-GAAP measure excluding land/community valuation adjustments and capitalized interest amortization, rose to 18.7% from 16.9%.
- Cash and equivalents were $1.212 billion at March 31, up from $1.083 billion at December 31, 2011; restricted cash was $89.9 million.
- Senior notes were $3.091 billion carrying value. Debt-to-total-capitalization was 61.6%, or 48.1% net of cash and equivalents, including restricted cash. A $96.6 million senior note matures in August 2012.
- Assets totaled $6.859 billion and shareholders’ equity was $1.929 billion at quarter-end. House and land inventory was $4.584 billion.
Material changes versus the prior comparable period
- Revenue increased 9%; home sale revenue rose 4%, reflecting a 5% higher average selling price, partly offset by 1% fewer closings.
- Net loss narrowed to $11.7 million from $39.5 million. Pretax homebuilding loss improved to $20.4 million from $46.4 million; Financial Services pretax income increased to $6.9 million from $1.0 million.
- SG&A fell 13% to $123.3 million, and declined to 15.2% of home sale revenue from 18.2%.
- Net new home orders increased 15% to 4,991 units despite 6% fewer active communities. Backlog rose 12% to 5,798 units, worth $1.586 billion; cancellations eased to 15% from 16%.
- Operating cash flow improved by $164.3 million, mainly from lower inventory and mortgage loans held for sale. Investing cash flow was $12.9 million provided, versus $114.0 million used, largely reflecting a smaller increase in restricted cash than in the prior year.
Outlook, commentary, risks and unusual items
- Management described demand as relatively stable but near historically low levels and said its 2012 outlook was “cautiously optimistic.” It expects profitability to be weighted toward the second half because of seasonality, and said its operational focus supports a profitable year; this is not quantified earnings guidance.
- Management cited affordability, low mortgage rates, rising rents and improved economic prospects as demand supports, while emphasizing uncertainty about the timing of a broad, sustainable housing recovery.
- Q1 included $4.5 million of land and community valuation adjustments, $0.6 million of land-held-for-sale valuation adjustments, and $0.7 million of land-option deposit/pre-acquisition write-offs. Total disclosed land-related charges were $5.9 million, versus $0.7 million a year earlier. Restructuring charges were $4.9 million, including lease-exit costs.
- The company held $2.5 billion of net deferred tax assets but fully reserved them because realization was uncertain. Its tax benefit reflected favorable resolutions of certain tax matters; the effective tax rate is affected by valuation allowances and unrecognized tax benefits.
- Mortgage loan representation-and-warranty liabilities were $123.5 million at quarter-end, down from $128.3 million at year-end. Management said future claims may exceed current estimates; claims are primarily associated with loans originated in 2006–2007.
- Self-insured claims reserves were $740.0 million. Management noted estimation uncertainty and potential for actual costs to differ materially. Other exposures include $1.2 billion of surety bonds, $219.3 million of letters of credit, and legal, regulatory, warranty and construction-defect claims.
- Management cited risks including mortgage financing availability and rates, land and construction costs, labor and insurance availability, housing-market conditions, regulation, litigation and tax matters. It said it believed current liquidity and borrowing resources were sufficient for foreseeable needs, while debt ratios remained above desired targets.
Important facts for investors to verify
- Whether stronger orders and backlog convert into closings, revenue and sustained profitability, particularly given the lower active-community count.
- Whether adjusted gross-margin improvement persists and how GAAP margins are affected by capitalized interest amortization and further inventory impairments.
- Cash-flow quality and seasonality: Q1 operating cash generation benefited from working-capital changes, including inventory and mortgage-loan balances.
- Debt maturities, leverage-reduction plans, and access to letter-of-credit and other financing facilities.
- Potential changes in mortgage repurchase claims, self-insurance reserves, and other contingencies, as well as realizability of deferred tax assets.