PulteGroup, Inc. (NYSE: PHM) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. PulteGroup is a U.S. homebuilder with mortgage, title, and insurance brokerage operations. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $3,926 | $3,359 | $7,114 | $6,089 |
| Income before taxes | $865 | $639 | $1,464 | $1,034 |
| Net income | $652 | $503 | $1,107 | $808 |
| Diluted EPS | $2.73 | $1.90 | $4.54 | $3.03 |
| Home-sale gross margin | 30.9% | 26.6% | 30.1% | 26.1% |
| Operating cash flow | Not separately stated for the quarter | $102 | $432 |
- Home-sale revenue rose 18% in both the quarter and first half. Average selling price increased 19% year over year to $531,000 in Q2; closings were down 1% to 7,177.
- Homebuilding pre-tax income increased 40% in Q2 and 51% in the first half. Financial Services pre-tax income declined 22% and 32%, respectively, as capture rates and revenue per loan fell amid mortgage-market competition.
- SG&A rose 29% in Q2 and 25% in the first half; SG&A as a share of home-sale revenue increased to 9.2% and 9.9%, respectively.
Balance sheet, debt, and liquidity
- At June 30, cash and equivalents were $663 million, restricted cash $69 million, and total inventory $10.7 billion, up from $9.0 billion at year-end 2021. Homes under construction increased to $5.9 billion from $4.2 billion.
- Notes payable were $2.03 billion, including approximately $2.0 billion of senior notes. Financial Services debt was $443 million, down from $626 million at December 31, 2021. The company had no borrowings under its revolving credit facility.
- Available revolving-credit capacity, net of letters of credit, was $903 million. In June, the facility was extended to June 2027 and its maximum capacity increased to $1.3 billion, with an uncommitted accordion to $1.8 billion. The company reported covenant compliance.
- Homebuilding debt-to-total capitalization, excluding Financial Services debt, was 20.8%, compared with 21.3% at year-end 2021.
- First-half operating cash flow was $102 million, versus $432 million a year earlier. A $1.68 billion inventory build was largely offset by net income of $1.11 billion and a $393 million reduction in mortgage loans held for sale. Investing used $123 million; financing used $1.08 billion, including $794 million of share repurchases and $74 million of dividends. Cash and restricted cash fell by $1.10 billion from year-end.
Demand, outlook, and risks
- Net new orders fell 23% in Q2 and 21% in the first half by units. Q2 order dollars declined 8%; first-half order dollars declined 3%. The cancellation rate rose to 15% in Q2 from 7% a year earlier, and to 12% for the first half from 8%.
- Backlog at June 30 was 19,176 homes, down 4% by units year over year, but backlog value rose 18% to $11.6 billion, reflecting higher selling prices and longer production times.
- Management said rising mortgage rates, home prices, and broader inflation had weakened affordability and tempered demand. Construction labor and materials constraints, municipal approval delays, and supply-chain disruption extended Q2 construction time by about eight weeks versus the prior year and two weeks versus Q1.
- The company had moderately increased sales incentives in certain communities and increased speculative starts to address production delays and provide homes that could close sooner. Management expected affordability, supply-chain, and labor conditions to affect the industry for the remainder of 2022, while expressing confidence in liquidity and housing demand. The filing provides no quantified earnings or revenue guidance.
- Management expected land acquisition and development, home construction, operating expenses, dividends, and buybacks to be significant funding needs over the next 12 months. Pulte Mortgage’s $550 million repurchase agreement, with $443 million outstanding, matured July 28, 2022; management intended to refinance it but cautioned that renewal or replacement on commercially reasonable terms was not assured.
- Other risks include volatile construction costs and the possibility that pricing cannot offset them; land and labor availability; interest rates and mortgage financing; COVID-19 and geopolitical disruption; and uncertainty in long-tail construction-defect and insurance claims. Recorded reserves for insurance claims were $653 million at June 30; actual costs could differ materially.
Period comparability and unusual items
Prior-year comparisons include a $49.1 million Q2 2021 insurance-reserve reversal ($55.2 million for the first half) that benefited SG&A, and a $61.5 million first-half 2021 loss on debt retirement. These items affect the comparison of reported earnings. The 2022 effective tax rate was 24.5% for Q2 and 24.4% for the first half, above 2021 rates, partly because federal energy-efficient home credits expired after 2021.
Important facts for investors to verify
- Subsequent filings or company disclosures on refinancing Pulte Mortgage’s repurchase agreement after its July 28, 2022 maturity.
- Whether order trends, cancellation rates, backlog conversion, and sales incentives worsen as mortgage rates and affordability pressures evolve.
- Whether construction cycle times and material and labor costs improve, and whether home-sale margins remain near Q2 levels.
- Cash generation relative to inventory investment, planned land spending, and the company’s ongoing repurchases and dividends.
- Developments in the $653 million insurance-claim reserve and related recovery estimates, as well as the $6.5 billion remaining purchase price under land options.