PulteGroup, Inc. — Q3 2019 Form 10-Q
Business and period: U.S. homebuilder with mortgage, title and insurance brokerage operations. This summary covers the three and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in millions except per-share data and homebuilding statistics.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $2,710.4 | $2,649.4 | $7,196.0 | $7,189.2 |
| Income before taxes | $366.1 | $384.7 | $903.6 | $1,018.0 |
| Net income | $273.1 | $289.5 | $680.9 | $784.4 |
| Diluted EPS | $0.99 | $1.01 | $2.44 | $2.71 |
| Homebuilding gross margin on home sales | 23.1% | 24.0% | 23.2% | 23.9% |
| Operating cash flow | — | $582.8 | $1,015.0 |
- Q3 revenue rose 2%, while net income fell 6%; nine-month revenue was essentially flat, while net income declined 13% year over year.
- Home sale revenue increased 3% in Q3 and 1% for the nine months. Q3 closings rose 3% to 6,186; average selling price was $426,000. Nine-month closings were nearly unchanged at 16,410.
- Net new orders increased 13% in Q3 and 4% year to date. September 30 backlog was 11,638 homes, up 4%, valued at $5.01 billion, up 2%. Cancellation rates were 15% for Q3 and 14% year to date.
- Homebuilding pretax income declined 9% in Q3 and 13% year to date, principally reflecting lower gross margins. Financial Services pretax income increased 64% in Q3 and 29% year to date, supported by higher volumes, capture rate and revenue per loan.
- At September 30, cash and equivalents were $737.0 million, restricted cash was $31.7 million, and total cash including restricted cash was $768.6 million, versus $1,133.7 million at year-end 2018. The company had $732.7 million of unused revolving-credit availability and no revolver borrowings.
- Notes payable were $2,744.2 million, down from $3,028.1 million; Financial Services debt was $249.4 million, down from $348.4 million. Debt to total capitalization, excluding Financial Services debt, was 34.6%, versus 38.6% at year-end and within management’s 30%–40% target range. The company reported covenant compliance.
- Nine-month operating cash flow fell to $582.8 million from $1,015.0 million, mainly as inventory investment increased by $427.2 million. Investing cash outflow was $210.4 million, including the $163.7 million American West acquisition. Financing cash outflow was $737.4 million, including $297.4 million of debt repayments, $244.4 million of share repurchases and $92.2 million of dividends.
Changes, outlook and notable items
- Management described housing demand as improving, citing increased traffic and orders, lower mortgage rates and slower price appreciation. It expressed a positive view of the housing cycle and its market position, but provided no specific quantitative earnings or revenue guidance.
- Gross margin declined 90 basis points in Q3 and 70 basis points year to date. Management cited community mix, pressure on land and construction costs, slightly higher amortized interest, and moderately higher sales discounts. Elevated completed speculative homes could modestly pressure future margins because they may sell at a discount.
- Regional results were mixed: Florida pretax income rose 21% in Q3, while West pretax income fell 28%, including weaker Northern California performance. Southeast income was affected by $9.0 million of estimated repair costs in a closed-out community during Q3 ($14.8 million year to date).
- Year-to-date comparisons also reflect $26.4 million of California land-sale gains in 2018 and a larger prior-year insurance-reserve reversal. In 2019, the company recorded a $24.0 million write-off of insurance receivables and a $4.8 million loss on retiring $274.0 million of notes due 2021.
- American West’s Las Vegas homebuilding operations were acquired in April for $163.7 million. The acquisition included about 1,200 finished lots and control of about 2,300 additional lots through options.
- Share repurchases totaled $244.4 million for the first nine months; the board increased authorization by $500 million in May, leaving $555.5 million available at September 30. The quarterly dividend increased 22% to $0.11 per share.
- Land options carried $3.26 billion of remaining purchase price and $287.6 million of deposits and pre-acquisition costs. Outstanding letters of credit were $267.3 million and surety bonds were approximately $1.4 billion.
- Key risks include housing demand and affordability, mortgage rates and financing availability, land and construction costs, labor and insurance availability, and legal, regulatory and construction-defect claims. General-liability and other insurance reserves were $725.3 million; related insurance receivables were $104.3 million after the write-off. Management noted uncertainty in estimating long-tail claims and possible losses beyond recorded reserves.
- A legacy mortgage-related Lehman claim against CTX Mortgage alleges indemnifiable losses of up to $261 million. The company says it has defenses and has accrued its best estimate within a range; the filing does not provide the specific accrual for this claim. Management stated that it did not expect pending legal matters overall to materially adversely affect results, financial position or cash flows, while acknowledging actual outcomes could exceed reserves.
Important facts for investors to verify
- Whether stronger orders and backlog translate into closings without further erosion in homebuilding gross margins.
- How Northern California and other weaker markets perform, and whether completed speculative inventory requires additional discounts.
- The development of Southeast repair costs, insurance-reserve estimates, insurance receivable recoveries and legacy mortgage litigation.
- Cash generation and inventory growth relative to capital returns, land investment and debt reduction.
- Land-option commitments, contingent letters of credit and surety bonds, and continued compliance with credit-facility covenants.