Business Context and Reporting Period
Company: Pulte Homes, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Pulte Homes is a holding company primarily engaged in homebuilding and financial services. Its homebuilding operations are conducted through subsidiaries including Pulte Home Corporation and Del Webb Corporation, targeting first-time, move-up, and active adult buyers across 52 markets in 27 states. The company also operates a mortgage banking subsidiary, Pulte Mortgage. In 2005, the company sold its Mexico and Argentina homebuilding operations, which are reported as discontinued operations.
Key Financial Metrics
| Metric | 2006 | 2005 | 2004 |
|---|---|---|---|
| Total Revenues | $14.27 billion | $14.69 billion | $11.51 billion |
| Net Income | $687.5 million | $1.49 billion | $986.5 million |
| Diluted EPS | $2.66 | $5.68 | $3.79 |
| Homebuilding Settlements (Units) | 41,487 | 45,630 | 38,612 |
| Average Selling Price | $337,000 | $315,000 | $287,000 |
| Homebuilding Gross Margin | 17.4% | 23.4% | 22.6% |
| Net New Orders (Units) | 33,925 | 47,531 | 40,576 |
| Ending Backlog (Units) | 10,255 | 17,817 | 15,916 |
| Total Assets | $13.18 billion | $13.06 billion | $10.41 billion |
| Senior Notes Outstanding | $3.54 billion | $3.39 billion | $2.86 billion |
| Cash and Equivalents | $551.3 million | $1.00 billion | $308.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 3% to $14.27 billion, driven by a 9% drop in home settlement units, partially offset by a 7% increase in average selling price.
- Profitability Compression: Net income fell 54% to $687.5 million. Homebuilding pre-tax income dropped 56% to $1.01 billion due to weaker demand, higher cancellations, and significant valuation adjustments.
- Inventory Write-Downs: The company recorded $505 million in total valuation adjustments and write-offs in 2006, including:
- $203.8 million in land and community valuation adjustments.
- $54.6 million in net realizable value adjustments for land held for sale.
- $151.2 million in write-offs of deposits and pre-acquisition costs for land options no longer being pursued.
- $95.4 million in valuation adjustments related to unconsolidated joint ventures.
- Backlog Reduction: Ending backlog decreased 42% to 10,255 units ($3.6 billion) from 17,817 units ($6.3 billion) in 2005.
- Financial Services Growth: Pre-tax income from financial services increased 64% to $115.5 million, aided by a $31.6 million gain on the sale of a Mexican mortgage banking investment (Su Casita).
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes the industry is in an economic down cycle characterized by lack of consumer confidence, decreased affordability, and large inventories of resale and new homes. This has led to slower sales, higher cancellation rates (29.4% year-to-date in 2006 vs. 17.3% in 2005), and increased price discounts.
- Strategic Adjustments: The company is shortening its land pipeline, reducing production volumes, and slowing land purchases. It is also reducing the number of speculative homes put into production.
- Future Impairment Risk: Management warns that if industry conditions worsen, additional valuation and net realizable value adjustments could be significant.
- Liquidity: The company maintains a strong liquidity position with $551.3 million in cash and $1.45 billion available under its unsecured revolving credit facility. The debt-to-total capitalization ratio was approximately 35%.
- Legal Proceedings: The company is involved in a Clean Water Act inquiry regarding storm water discharge practices. While negotiations are ongoing, the company cannot currently estimate the costs of resolution.
Key Facts for Investor Verification
- Inventory Valuation: Verify the adequacy of the $505 million in land and inventory write-downs and assess the risk of further impairments given the ongoing market downturn.
- Cancellation Rates: Monitor the trend of cancellation rates, which rose significantly to 29.4% in 2006, impacting net new orders and backlog.
- Land Pipeline: Review the reduction in controlled lots (from 362,600 in 2005 to 232,200 in 2006) and the company's ability to maintain future growth with a smaller land inventory.
- Discontinued Operations: Note that the 2005 results included a $48.7 million gain from a government settlement regarding the former First Heights thrift operation, which is not a recurring item.
- Joint Venture Exposure: Assess the $95.4 million loss recorded in unconsolidated joint ventures, primarily in California, and the potential for further losses if collateral values decline.