PulteGroup, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited interim results; amounts below are in millions except per-share data, percentages, and home counts.
Business context and results
PulteGroup is a U.S. homebuilder operating across six regions, with mortgage and title operations through Financial Services. Management described housing demand as improving but recovering slowly, supported by the economy, demographics, and low mortgage rates.
- Q3 revenue: $1,506.7, down 5.5% year over year. Homebuilding revenue was $1,467.8, down 6%; Financial Services revenue was $39.0, up 16%.
- Q3 profit: Pretax income was $179.3, down 20%; net income was $107.8, down 23%; diluted EPS was $0.30 versus $0.37. Homebuilding pretax income fell 23% to $164.9, while Financial Services pretax income rose 32% to $14.4.
- Nine-month revenue and profit: Revenue was $3,920.3, down 2%. Pretax income increased 5% to $442.7; net income increased 3% to $266.1; diluted EPS was $0.73 versus $0.67.
- Homebuilding margins: Home-sale gross margin was 23.6% in Q3 versus 22.9% a year earlier, and 23.2% for nine months versus 23.4%. SG&A was 10.9% of home-sale revenue in Q3 versus 9.5%, and 11.9% year to date versus 13.4%.
- Operating indicators: Q3 closings fell 6% to 4,356; average selling price increased 1% to $336,000. Net new orders rose 8% to 4,092, and ending backlog increased 10% to 8,734 homes, valued at $3,089.1.
Cash flow, balance sheet, and debt
- Operating cash flow: Used $246.8 in the first nine months, versus $201.8 provided in 2014. The main use was an $835.3 inventory increase from land investment and seasonal homebuilding; increased spending on land deposits and pre-acquisition costs also used cash.
- Cash: Cash and equivalents were $734.2 at September 30, down from $1,292.9 at year-end 2014; restricted cash was $25.9. Net cash decreased $558.7 over the nine-month period.
- Inventory: House and land inventory rose to $5,240.9 from $4,392.1 at year-end. Total assets were $8,801.6 and shareholders’ equity was $4,571.6.
- Debt and liquidity: Senior notes were $1,584.1 and a new $500.0 unsecured term loan was outstanding at quarter-end; Financial Services debt was $107.5. The company reported a 31.3% debt-to-total-capitalization ratio excluding Financial Services debt. Its $500.0 revolving facility had no borrowings and $196.9 of letters of credit outstanding. The company reported compliance with debt covenants.
- Capital returns: In the first nine months, PulteGroup repurchased 21.2 million shares for $433.7 and declared $86.3 of dividends. Remaining share-repurchase authorization was $304.8 at quarter-end.
Material changes and management outlook
- Management reported net new orders up 7% for the first nine months, but closings down 3%, citing tight construction labor, adverse weather, and delays opening new communities. These delays also contributed to higher backlog and production levels.
- The company planned to open approximately 200 communities in 2015 and expected to operate approximately 600–630 communities during the year. Management noted entitlement and land-development delays as execution challenges; no earnings or revenue guidance was provided.
- Management characterized the housing recovery as slow and sustained and cited employment, low mortgage rates, and demographic trends as supports. It emphasized improving construction and asset efficiency, supporting growth, and returning capital to shareholders.
- Q3 included a $20.0 charge for the Applecross jury verdict, for which PulteGroup said it had filed post-trial motions and intended to appeal if unsuccessful. A separate legal settlement generated reserve reversals of $5.7 in Q3 and $32.6 year to date.
- Other comparisons are affected by prior-year items, including an $84.5 insurance-reserve charge and an $18.6 reduction in Financial Services loan-origination liabilities in 2014. The filing says underlying Homebuilding pretax income decreased in both Q3 and the nine-month period after excluding specified unusual items, primarily due to lower closings and higher overhead.
- Key risks include labor availability and cost, weather, land and construction costs, mortgage-rate and financing changes, homebuyer demand, insurance coverage and claims estimates, mortgage-loan repurchase obligations, and litigation. The company had $702.5 of recorded self-insurance reserves; estimates may differ materially from eventual costs.
Most important facts for investors to verify
- Whether labor and community-opening constraints ease enough to convert the 10% larger backlog into closings and cash receipts.
- Whether inventory growth and land investment can be funded while maintaining liquidity and the stated capital-return program.
- Developments in the Applecross post-trial motions or appeal, and changes in insurance, warranty, and mortgage-loan repurchase reserves.
- Near-term funding and refinancing needs, including the $500.0 term loan’s January 2017 initial maturity and the senior notes due in 2016 and 2017.
- Whether order growth, cancellation rates, pricing, and regional performance remain supportive of margins; Q3 cancellation rate was 17%, and Texas and several other regions reported weaker closings or pretax results.