PulteGroup, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the same 2017 periods unless otherwise stated. PulteGroup is a U.S. homebuilder with mortgage, title, and insurance brokerage operations. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $2.570 billion | $2.022 billion | $4.540 billion | $3.652 billion |
| Income before tax | $409.2 million | $122.5 million | $633.4 million | $261.8 million |
| Net income | $324.1 million | $100.7 million | $494.8 million | $192.3 million |
| Diluted EPS | $1.12 | $0.32 | $1.71 | $0.60 |
| Home-sale gross margin | 24.0% | 21.1% | 23.8% | 22.1% |
| Operating cash flow | Not presented separately for the quarter | $547.6 million | $176.3 million |
Q2 revenue increased 27%; home-sale revenue rose 25%, reflecting 14% more closings and a 10% higher average selling price ($427,000 versus $390,000). First-half home-sale revenue rose 23%, with closings up 12% and average selling price up 10%. Financial Services pretax income increased 9% in Q2 and 6% in the first half.
Balance sheet, debt, and liquidity
- At June 30, cash and equivalents were $367.1 million; restricted cash was $34.8 million, for total cash and restricted cash of $401.9 million, versus $306.2 million at year-end 2017.
- House and land inventory was $7.500 billion, up from $7.147 billion at December 31, 2017. Residential mortgage loans held for sale were $369.6 million, down from $570.6 million.
- Notes payable were $3.006 billion, including approximately $3.0 billion of senior notes. Financial Services debt was $264.0 million. No borrowings were outstanding under the revolving credit facility.
- The company reported a 39.9% debt-to-capitalization ratio, excluding Financial Services debt. Revolver availability, net of letters of credit, was $785.4 million; the company was in compliance with its credit covenants.
- Operating cash flow benefited from pretax income, deferred taxes, and a seasonal $199.6 million reduction in mortgage loans held for sale; cash use included a $281.4 million inventory increase. Investing cash outflow was $27.1 million and financing cash outflow was $424.7 million for the first half.
Material changes and operating trends
- Q2 closings rose 14% to 5,741 homes; first-half closings rose 12% to 10,367. Active communities increased 5% year over year to 847.
- Q2 net new orders decreased 1% in units but increased 3% in dollars. First-half orders rose 6% in units and 10% in dollars. June backlog increased 11% in units to 11,845 and 17% in value to $5.205 billion.
- Management attributed margin and earnings improvement to stronger pricing and community mix, higher volume and overhead leverage, and lower prior-year land charges. SG&A was 9.2% of home-sale revenue in Q2 versus 11.0% a year earlier.
- Results included $26.4 million of gains from two California land sales and a $37.9 million reversal of insurance reserves in Q2 and the first half. Prior-year comparisons included $125.6 million of Q2 land-related charges, including land impairments and write-downs, and a $12.1 million warranty charge.
- The company adopted ASC 606 on January 1, 2018, recording a $22.4 million net increase to opening retained earnings; adoption did not materially affect first-half revenue.
Outlook, risks, and contingencies
- Management cited economic growth, employment and consumer confidence as supports for housing demand, and said favorable conditions and the $5.2 billion backlog positioned the business for strong performance through 2018. The filing gives no specific numerical earnings or revenue guidance.
- Management reported increased community traffic but weaker-than-expected conversion to orders beginning in May as mortgage rates rose, particularly among first-time and move-up buyers. Affordability, higher rates, and constrained land and labor supply were cited as headwinds. Lumber and trade labor costs remained elevated.
- Financial Services faced increased competition, loan-pricing pressure, and lower origination margins as refinance activity slowed. Its repurchase agreement, with $264.0 million outstanding, was scheduled to mature in August 2018.
- General-liability and other self-insurance reserves were $725.5 million at June 30; management noted substantial estimation uncertainty, especially for incurred-but-not-reported claims. Insurance receivables included $22.3 million involved in an arbitration with a carrier.
- Other exposures included $1.2 billion of surety bonds, $214.6 million of letters of credit, $2.7 billion of remaining land-option purchase prices, and limited-recourse guarantees tied to joint-venture debt. Management did not expect legal or regulatory matters or these performance instruments to have a material adverse effect, but noted actual outcomes could differ from estimates.
Important facts for investors to verify
- Whether order trends and cancellations—14% in Q2 versus 13% a year earlier—reflect sustained pressure from mortgage rates and affordability.
- How much reported earnings growth depends on one-time land-sale gains and insurance-reserve reversals, and whether underlying margins remain durable.
- Developments in construction-defect reserves, insurance recoveries, and the $22.3 million carrier arbitration.
- Repurchase-agreement renewal or replacement after its August 2018 maturity, and continuing access to revolver capacity.
- Inventory and land commitments, including the $2.7 billion remaining purchase price under land options, relative to future demand and cash generation.