PulteGroup, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and reporting period
PulteGroup is a U.S. homebuilder operating through six Homebuilding regions and a Financial Services business that includes mortgage banking, title, and insurance brokerage. The quarter’s reported results largely reflect demand before the full effects of COVID-19 restrictions, which intensified in March and after quarter-end.
Financial and operating results
- Revenue: $2,295 million, up 15% from $1,997 million a year earlier. Homebuilding revenue was $2,240 million; Financial Services revenue was $54.6 million.
- Profit: Net income was $203.7 million, up 22% from $166.8 million. Diluted EPS was $0.74 versus $0.59. Pretax income was $263.8 million; the effective tax rate was 22.8% versus 23.0%.
- Homebuilding: Pretax income increased 20% to $244.2 million. Home closings rose 16% to 5,373, while average selling price declined 2% to $413,000. Home-sale gross margin improved to 23.7% from 23.4%; SG&A was 11.9% of home-sale revenue versus 13.0%.
- Orders and backlog: Net new orders increased 16% to 7,495 homes; order value rose 19% to $3.27 billion. Backlog grew 20% to 12,629 homes, valued at $5.58 billion. The cancellation rate was 13%, up from 12%.
- Financial Services: Pretax income increased 58% to $19.6 million. Revenue rose 24% to $54.6 million; mortgage originations increased 29% by loan count, and the capture rate improved to 86.8% from 79.7%.
- Cash flow: Operating cash flow was $204.6 million versus $158.9 million. Investing cash outflow was $95.8 million, including $83.2 million paid toward the ICG acquisition. Financing provided $491.0 million, primarily reflecting a $700 million revolver draw. Cash, cash equivalents, and restricted cash ended at $1.851 billion.
- Debt and liquidity: At March 31, notes payable were $2.756 billion, revolver borrowings $700 million, and Financial Services debt $270 million. Unrestricted cash was $1.817 billion; unused revolver availability after letters of credit was $43.9 million. Debt to capitalization excluding Financial Services debt was 38.5%, compared with 33.6% at year-end. The company reported compliance with debt covenants.
- Capital returns: The company declared $32.6 million in dividends and repurchased 2.8 million shares for $95.7 million during the quarter. It subsequently suspended share repurchases in response to COVID-19.
Material changes versus the prior comparable period
- Revenue, net income, diluted EPS, operating cash flow, closings, orders, and backlog were higher than in Q1 2019. Home-sale gross margin rose 30 basis points, and SG&A leverage improved.
- The company drew $700 million on its revolving facility as a COVID-19 precaution, increasing reported debt and leverage. The draw contributed to a $599.8 million increase in cash during the quarter.
- Investing cash outflow increased, principally due to the ICG acquisition. The acquisition’s total stated purchase price was $104 million, with $83.2 million paid in January and additional $10.4 million payments due in each of 2021 and 2022.
- A $20.2 million goodwill impairment was recorded for ICG following broad declines in publicly traded construction-company valuations. Land-related charges increased to $9.7 million from $3.0 million.
Outlook, management commentary, and risks
- Management provided no quantified full-year guidance and said the duration and severity of the pandemic could not reasonably be estimated. It cautioned that an extended U.S. slowdown could materially affect financial position, results, and cash flows.
- Net new orders rose more than 30% year over year in January and February, but March orders fell 11% year over year; management said the slowdown continued into April and cancellations increased. Construction and sales were significantly curtailed in Washington, Michigan, Pennsylvania, and certain Northern California counties. Construction delays and reduced municipal and private-service capacity also affected operations.
- Actions included shifting sales and customer interactions online or to appointment-only formats, enhanced safety protocols, limiting unsold spec-home production, delaying some land purchases and development, and drawing on the revolver. Management stated it believed available financial resources and these actions provided adequate liquidity for the foreseeable future.
- Key risks include further reductions in orders, closings, and home prices; higher cancellations; construction delays or disruptions; reduced availability or higher cost of labor and materials; inventory impairments or land-option write-offs; and pressure on liquidity or debt-covenant compliance if disruption persists.
- At March 31, remaining land-option purchase commitments were $3.3 billion, supported by $303.6 million of deposits and pre-acquisition costs. Outstanding letters of credit were $256.1 million and surety bonds approximately $1.4 billion. Management said it did not expect a material amount of these guarantees to be drawn.
- Contingencies include $25.2 million of recorded liabilities for legacy mortgage-loan claims, including litigation alleging up to $261 million in indemnifiable losses against a former mortgage subsidiary. The company said it believed it had meritorious defenses. General-liability and other insurance reserves totaled $719.2 million and are subject to significant estimation uncertainty.
Most important facts for investors to verify
- How April and subsequent-period orders, cancellations, backlog conversion, and home closings compared with Q1’s strong year-over-year results.
- The effects of COVID-19 restrictions on construction capacity, sales activity, pricing, margins, and cash generation across regions.
- Whether the $1.817 billion of unrestricted cash and limited $43.9 million of unused revolver availability remain adequate, and how the revolver draw affects leverage and covenant headroom.
- Whether the ICG goodwill impairment, land-related charges, inventory valuations, and land-option deposits require further charges.
- Developments in the July 2020 maturity of Pulte Mortgage’s repurchase agreement and in legacy mortgage litigation, insurance reserves, and other contingencies.