PulteGroup, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. PulteGroup is a U.S. homebuilder with mortgage and title operations. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $1,302.6 | $1,141.9 | $3,253.0 | $2,874.3 |
| Income (loss) before tax | $105.9 | $(202.5) | $132.3 | $(301.2) |
| Net income (loss) | $116.6 | $(129.3) | $147.4 | $(224.2) |
| Diluted EPS | $0.30 | $(0.34) | $0.38 | $(0.59) |
- Home sale revenue rose 12% in Q3 and 10% for the nine months. Closings increased 5% and 3%, respectively; average selling price increased 6% and 7%.
- Home sale gross margin was 17.0% in Q3 and 15.2% for the nine months, versus 13.9% and 13.0% a year earlier. Adjusted margins, a non-GAAP measure excluding land/community valuation adjustments and capitalized interest amortization, were 21.6% and 20.4%, respectively.
- Net new orders increased 27% in Q3 and 25% year to date. Backlog at September 30 was 7,686 homes, up 49%, with a value of $2,246.3, up 61%. The cancellation rate was 16% in Q3 versus 21%.
- Operating cash flow was $421.2 for the nine months, compared with cash used of $160.0 a year earlier. The company attributed the improvement mainly to earnings and a $161.0 inventory reduction. Cash and equivalents were $1,563.7; restricted cash was $76.7.
- Senior notes had a carrying value of $2,999.8 at September 30; Financial Services debt was $103.0. Excluding Financial Services borrowings, debt to total capitalization was 58.6%, or 39.0% net of cash and equivalents, including restricted cash. Management said leverage remained above its desired targets.
- Total assets were $7,140.6 and shareholders’ equity was $2,122.0. House and land inventory was $4,470.6, down from $4,636.5 at year-end 2011.
Material changes versus the prior comparable period
- The company returned to quarterly and year-to-date profitability. The comparison is substantially affected by $240.5 of goodwill impairment recorded in 2011; higher revenue, improved homebuilding margins, and better overhead leverage also contributed to the improvement.
- Financial Services pretax income rose to $26.7 in Q3 from $8.6, and to $49.6 for the nine months from a $7.0 loss. Higher mortgage volume, revenue per loan, and expense leverage helped; the prior-year nine-month period included $19.3 of loan-origination liability reserves.
- SG&A as a percentage of home sale revenue improved to 10.2% in Q3 from 11.0%, and to 12.1% year to date from 14.5%. Unsold homes in production fell 48% year over year.
- Cash and equivalents increased from $1,083.1 at December 31, 2011. Senior notes declined from $3,088.3, including $96.4 retired at scheduled maturity during the first nine months.
Outlook, risks, contingencies, and unusual items
- Management expected to be profitable for full-year 2012 and described its outlook for the remainder of 2012 and into 2013 as optimistic, while cautioning that the timing of a broad, sustainable housing recovery remained uncertain. No specific revenue or earnings guidance was provided.
- On October 24, 2012, after quarter-end, the company announced a tender offer to repurchase up to $1.0 billion of senior notes maturing from 2013 to 2016. It expected a fourth-quarter loss because the notes traded above par; the loss amount depended on participation and prices.
- The company fully reserved its $2.5 billion of net deferred tax assets. Management said continued profitability and favorable business trends could support reducing a large portion of the valuation allowance during 2013; this was conditional, not a forecasted release.
- Mortgage loan repurchase and make-whole liabilities were $118.6. Management said future losses could exceed current estimates. Separately, it disclosed potential Centex-related indemnification exposure involving RMBS transactions; the amount was not quantifiable, and the company did not expect a material adverse impact.
- Self-insured claim reserves were $723.8, largely for general liability claims, and actual costs could differ significantly from estimates. Outstanding letters of credit were $190.7 and surety bonds approximately $1.1 billion; the company did not expect a material amount to be called. Land option agreements carried $819.3 of remaining purchase price, generally cancellable at the company’s discretion.
- Land and community impairment charges were $9.6 for the nine months, versus $4.9 a year earlier. Management warned that weaker markets or strategy changes could require further, potentially significant write-downs. Other identified risks included mortgage financing availability, interest rates, construction and land costs, insurance, regulation, and litigation.
Important facts for investors to verify
- Whether stronger orders and backlog convert into closings and cash flow, particularly given fewer active communities and the seasonal pattern of fourth-quarter closings.
- Whether gross-margin improvement and overhead leverage persist, and how capitalized interest amortization and land impairments affect reported margins.
- The amount, pricing, and accounting loss from the announced senior-note tender offer, and the effect on debt, liquidity, and leverage.
- Developments in mortgage repurchase claims, RMBS indemnification matters, and self-insured construction-defect reserves.
- Whether sustained taxable profitability supports any deferred-tax-valuation-allowance release, and whether the company’s full-year profitability expectation is achieved.