PulteGroup, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. PulteGroup is a U.S. homebuilder with mortgage and title operations. Unless stated otherwise, amounts below are in millions.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $2,020.8 | $1,799.9 | $3,649.7 | $3,232.5 |
| Income before taxes | $122.5 | $189.6 | $261.8 | $307.8 |
| Net income | $100.7 | $117.8 | $192.3 | $201.1 |
| Diluted EPS | $0.32 | $0.34 | $0.60 | $0.57 |
| Home-sale gross margin | 21.1% | 25.2% | 22.1% | 25.3% |
- Revenue increased 12% in Q2 and 13% year to date, reflecting 6% growth in both closings and average selling price. Q2 closings were 5,044; average selling price was $390,000.
- Home-sale gross margin declined 410 basis points in Q2 and 320 basis points year to date. 2017 margins included land inventory impairments and a $12.1 million warranty charge; management also cited mix shifts and higher construction and land costs.
- Net new orders rose 12% in Q2 and 10% year to date by units. June 30 backlog was 10,674 homes, valued at $4.46 billion, up 10% and 19%, respectively, from a year earlier. Cancellation rates were 13% in Q2 and 12% year to date.
- Financial Services pretax income increased 11% in Q2 and 21% year to date, supported by higher loan volume, higher revenue per loan, and improved expense leverage.
- Six-month operating cash flow was $176.3 million, versus cash used of $320.1 million in 2016. The 2017 result included a $486.4 million inventory cash outflow, partly offset by $129.1 million of noncash land-related charges and a $172.9 million reduction in mortgage loans held for sale.
Financial position, liquidity, and capital allocation
- At June 30, cash, cash equivalents, and restricted cash totaled $239.9 million, down from $723.2 million at year-end 2016. Inventory was $7.09 billion, compared with $6.77 billion.
- Senior notes carried a $3.11 billion book value; Financial Services debt was $153.7 million. The company had no revolver borrowings and $516 million available under its $750 million revolving facility. The facility matures in June 2019; the company reported compliance with its covenants.
- Debt to total capitalization was 41.2%, excluding Financial Services debt and limited-recourse notes payable. PulteGroup repurchased 17.5 million shares for $399.9 million and declared $56.9 million of dividends during the first half; $604.9 million of repurchase authorization remained at June 30.
- Operating cash-flow improvement and the cash decline should be viewed alongside substantial share repurchases, inventory investment, and seasonal working-capital needs.
Material changes, outlook, and unusual items
- PulteGroup committed to sell selected non-core or underutilized land: approximately 4,600 inactive lots plus two small communities representing about 400 lots. Disposition timing was unknown; proceeds and related tax benefits were intended for higher-return projects.
- Q2 land-related charges totaled $125.6 million, including $31.5 million of inventory impairments, $81.0 million of land-held-for-sale valuation adjustments, an $8.0 million investment impairment, and $5.1 million of option-deposit and pre-acquisition write-offs. Six-month charges totaled $129.1 million.
- Other notable items included a $12.1 million Florida warranty charge, a $19.8 million insurance-reserve reversal, and a $15.0 million write-off of insurance receivables in the first half. The effective tax rate was 17.8% for Q2 and 26.6% year to date, lower than 2016 largely due to tax-law changes and favorable state tax matter resolutions; adoption of a share-based compensation standard reduced first-half tax expense by $3.7 million.
- Management described U.S. housing demand as improving, citing job creation, consumer confidence, supportive interest rates, and limited new-home supply. It emphasized efficiency, disciplined land investment, growth, dividends, and repurchases. It expected to replace about one-third of communities in 2017, while warning that entitlement and land-development delays can hinder openings. The filing provides no specific earnings or revenue guidance.
- Risks include higher interest rates and construction or land costs, affordability and mortgage availability, labor and insurance costs, market and regulatory changes, and uncertainty in long-tail construction-defect claims. Recorded self-insurance reserves were $814.8 million; related insurance receivables were $261.8 million, including $99.3 million disputed in litigation. The company said outcomes could differ materially from estimates but did not expect pending legal matters to have a material adverse impact.
- Other obligations include $234.0 million of letters of credit, approximately $1.2 billion of surety bonds, $1.94 billion of remaining land-option purchase prices, and $26.3 million of limited-recourse guarantees related to joint-venture debt. Pulte Mortgage’s repurchase agreement expired in August 2017; its capacity had been reduced to $175 million after July 13, and management stated it believed liquidity was adequate, while noting renewal or replacement was not assured.
Important facts for investors to verify
- Progress, timing, and realized proceeds from the planned land dispositions, and whether additional write-downs are required.
- Backlog conversion, community openings, and whether sales-price and volume gains can offset land, construction, and mix-related margin pressure.
- Development of warranty and self-insurance claims, collection of disputed insurance receivables, and the adequacy of reserves.
- Renewal or replacement terms for Pulte Mortgage’s repurchase facility and continuing compliance with liquidity and debt covenants.
- Use of the remaining share-repurchase authorization and the effect of capital returns on cash and liquidity.
- Realization of deferred tax assets and resolution of open tax examinations and unrecognized tax benefits.