PULTEGROUP INC quarterly report, Q3 FY2013

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PulteGroup, Inc. — Q3 2013 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2013. Unless noted otherwise, dollar amounts below are in U.S. dollars. The filing presents financial statement amounts in thousands.

Business context and operating results

PulteGroup is a U.S. homebuilder with mortgage banking and title operations. Management described housing conditions as improving, while noting rising interest rates and fewer active communities. The company reported its sixth consecutive quarter of pretax income.

  • Q3 revenue: $1.582 billion, up 21% year over year. Homebuilding revenue was $1.548 billion; Financial Services revenue was $34.3 million.
  • Q3 homebuilding: Home sale revenue rose 21%, reflecting 9% more closings and an 11% higher average selling price. Closings were 4,817; average selling price was $310,000.
  • Q3 profitability: Pretax income was $174.7 million, versus $105.9 million. Home sale gross margin was 20.9%, compared with 17.0%; management’s adjusted, non-GAAP margin was 25.5%, versus 21.6%.
  • Q3 net income: $2.282 billion, or diluted EPS of $5.87, versus $116.6 million and $0.30 per diluted share. The 2013 result includes a $2.107 billion income tax benefit from reversing substantially all of the valuation allowance previously recorded against deferred tax assets; it is not representative of operating earnings.
  • Nine-month results: Revenue was $4.024 billion, up 24%; pretax income was $295.4 million, versus $132.3 million. Net income was $2.400 billion, or diluted EPS of $6.14, including a $2.105 billion tax benefit. Home sale gross margin improved to 19.4% from 15.2%.
  • Orders and backlog: Q3 net new orders fell 17% to 3,781 homes; the nine-month decline was 8%. Q3 cancellation rate was 18%, versus 16%. September-end backlog was 7,522 homes, down 2% in units but up 8% in value to $2.433 billion.
  • Financial Services: Q3 revenue declined 27% to $34.3 million and pretax income fell 58% to $11.1 million, primarily due to lower revenue per loan amid increased competition. Nine-month pretax income declined 16% to $41.8 million.

Cash flow, balance sheet and capital

  • Operating cash flow: $555.0 million for the first nine months, compared with $421.2 million in 2012. Cash and equivalents were $1.350 billion at September 30, versus $1.405 billion at year-end 2012; restricted cash was $69.4 million.
  • Debt: Senior notes carrying value was $2.057 billion, down from $2.510 billion at year-end; Financial Services debt was $115.1 million. The company retired $461.4 million of senior notes before maturity during the nine months and recorded $26.9 million in related losses.
  • Liquidity and leverage: Management reported a 31.4% debt-to-total-capitalization ratio excluding Financial Services borrowings, or 12.4% net of cash and equivalents, including restricted cash. It said current liquidity and borrowing resources were sufficient for foreseeable requirements.
  • Capital returns: The company reinstated its quarterly dividend and declared two $0.05-per-share dividends during Q3. It repurchased 5.3 million shares for $83.0 million in the quarter and had $269.3 million remaining under the then-current authorization at quarter-end.
  • Balance sheet change: Shareholders’ equity increased to $4.492 billion from $2.190 billion at year-end, primarily reflecting the tax valuation allowance reversal and earnings, partly offset by repurchases and dividends.

Changes, outlook and significant items

  • Homebuilding pretax improvement reflected higher revenue, stronger gross margins and improved overhead leverage. All six homebuilding segments reported higher Q3 pretax income than the prior-year quarter.
  • Active communities declined 15% year over year to 604. Management attributed lower order volumes principally to its planned community close-outs and disciplined land strategy, with higher mortgage rates also contributing. It expects its focus on pricing and returns to moderate order growth relative to the broader industry.
  • Management expressed confidence in a sustained U.S. housing recovery and expected future pretax earnings growth, including if sales volumes remained at existing levels. The filing provides no specific numerical earnings or revenue guidance. Management cautioned that rates may rise and moderate demand or pricing, while materials and labor costs were increasing.
  • Management plans to prioritize operating margins, use existing land more effectively, control unsold speculative homes and selectively invest in new communities. Unsold homes in production were 37% lower year over year.
  • Deferred taxes: The $2.1 billion valuation allowance reversal drove the reported net income surge. Management based the reversal on recent profitability, forecasts, improved housing conditions and other evidence; realization of deferred tax assets depends on future taxable income. A $231.0 million valuation allowance remained at quarter-end, with a portion expected to reverse in Q4.
  • Unusual charges: Nine-month results included $26.9 million of debt-retirement losses, $13.8 million of headquarters-relocation costs and $38.0 million of charges tied to a contractual dispute involving a previously completed luxury community. Management expected most, if not all, arbitration claims to be resolved in 2013; final outcome remained uncertain.
  • Relocation: The company announced a phased move of its corporate offices from Michigan to Atlanta, expected to be substantially complete by early 2015. Estimated costs were $21–$26 million for employee-related costs, $0.4–$0.5 million for asset impairments and $27–$32 million for lease termination and other exit costs. Approximately $2 million of additional relocation charges was expected in 2013.
  • Contingencies and exposures: Mortgage loan origination liabilities were $146.2 million; management said actual claims costs could differ from estimates. Recorded reserves for self-insured claims totaled $691.6 million, largely general liability, with substantial uncertainty in incurred-but-not-reported estimates. Outstanding surety bonds were approximately $1.0 billion and letters of credit $178.1 million. The company also disclosed ongoing litigation and regulatory matters, while stating it did not expect their resolution to have a material adverse impact.
  • Other risks cited include interest rates and mortgage availability, land and construction costs, labor and insurance availability, housing-market conditions, regulation, and legal claims. Management noted homebuilding seasonality, with historically higher Q4 closings and operating cash flow.

Key facts for investors to verify

  • Separate recurring operating performance from the one-time $2.1 billion tax benefit; review the assumptions supporting deferred tax asset realization.
  • Track new orders, cancellations, active communities and backlog conversion, particularly after the 17% Q3 order decline and rise in mortgage rates.
  • Assess whether gross-margin gains can persist amid material and labor cost inflation, and compare GAAP margins with management’s adjusted non-GAAP measure.
  • Monitor debt maturities, cash generation, repurchases and dividends, as well as the renewal and terms of Pulte Mortgage’s repurchase financing facility, which had $115.1 million outstanding and ran through September 2014.
  • Follow the resolution and ultimate cost of the luxury-community dispute, mortgage repurchase claims, self-insured claims and other contingencies.
  • Check actual relocation costs and timing against estimates, and evaluate land-option commitments: $1.4 billion of remaining purchase price, supported by $87.9 million of deposits and pre-acquisition costs.