PulteGroup, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. PulteGroup is a U.S. homebuilder operating in 49 markets across 25 states, with mortgage and title businesses. The filing also reports unaudited fourth-quarter results.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $7.668 billion | $5.982 billion |
| Income before taxes | $933.9 million | $816.0 million |
| Net income | $602.7 million | $494.1 million |
| Diluted EPS | $1.75 | $1.36 |
| Operating cash flow | $68.3 million | $(337.6) million |
| Home sale gross margin | 25.0% | 26.9% |
- Homebuilding revenue was $7.487 billion, including $7.451 billion of home sales; Financial Services revenue was $181.1 million. Home closings rose 16% to 19,951, while average selling price increased 10% to $373,000.
- Homebuilding income before taxes rose 14% to $860.8 million; Financial Services income before taxes increased 24% to $73.1 million. The effective tax rate was 35.5%, down from 39.5%.
- Fourth-quarter consolidated revenue was $2.493 billion, pretax income $413.7 million, net income $273.2 million, and diluted EPS $0.83.
- At year-end, cash, cash equivalents and restricted cash totaled $723.2 million. Home and land inventory was $6.771 billion, up from $5.450 billion.
- Senior notes totaled $3.110 billion and Financial Services debt was $331.6 million; the company had no revolver borrowings. Debt to total capitalization was 40.0%, excluding Financial Services debt and limited-recourse notes. Revolver availability, net of letters of credit, was $530.9 million.
- Operating cash flow improved from 2015 but was limited by a $897.1 million inventory increase to support future operations. Investing activities used $471.2 million, including $430.5 million for Wieland. Financing activities provided $350.7 million, including $2.0 billion of note proceeds, offset in part by debt repayments, $600.0 million of share repurchases and dividends.
Material changes versus 2015
- Total revenue grew 28%; home sale revenue grew 29%, reflecting 16% more closings and a 10% higher average selling price. Net new orders increased 13% to 20,326 units; year-end backlog rose 10% to 7,422 homes, valued at $2.942 billion.
- Home sale gross margin declined 190 basis points to 25.0%. Management cited community mix, stable rather than stronger pricing, higher construction and land costs, and Wieland-related fair-value adjustments. SG&A fell to 12.8% of home sale revenue from 13.7%, despite higher absolute expenses.
- The January 2016 Wieland asset acquisition added move-up-market communities and contributed to higher closings and selling prices. The company also opened approximately 200 communities during the year.
- Senior notes increased substantially following $2.0 billion of 2016 issuances; proceeds funded maturities and repayments, including retirement of the term loan. Share repurchases increased to $600.0 million from $433.7 million.
Outlook, commentary, risks and unusual items
- Management expected overall housing conditions to continue improving, though unevenly by market, and expected to open more new communities in 2017 than in 2016 to support volume growth. No specific earnings or revenue guidance was provided.
- Management cited ongoing job creation, low unemployment, low mortgage rates and limited new-home supply as supportive. It emphasized disciplined land investment, construction efficiency, inventory turns and shareholder returns.
- Key risks include the cyclical housing market; higher mortgage rates or reduced credit availability; land, labor and materials shortages or cost inflation; construction and entitlement delays; competition; regulatory and environmental requirements; and weather or natural disasters.
- Construction-defect and insurance estimates are significant and uncertain. Recorded self-insurance reserves were $831.1 million, with management’s estimated reasonably possible loss range of $750 million to $975 million. Insurance receivables were $307.3 million, including $113.6 million being litigated with insurers.
- Unusual items included a $55.2 million general-liability reserve reversal in 2016, a $15.0 million charge for settlement of a disputed land transaction, $19.3 million of land-related charges, and relocation, severance and lease-exit costs. The reserve reversal benefited earnings; 2015 also included $62.2 million of reserve reversals and a $20.0 million Applecross charge.
- The company reported a $1.049 billion net deferred tax asset, subject to future taxable income and tax-law assumptions. Various tax examinations and legal matters remain unresolved; management did not expect pending litigation and regulatory matters, taken as a whole, to materially affect results, but excess losses could be significant.
Most important facts for investors to verify
- Whether backlog converts into 2017 closings as expected, considering cancellations, which were 15% in 2016, and the pace of new-community openings.
- Whether gross margins stabilize as labor, materials and land costs rise, and whether the 2016 volume gains persist without greater discounting.
- The sustainability of earnings benefits from insurance-reserve releases and the ultimate collectability of disputed insurance receivables; compare actual claims and recoveries with the disclosed reserve range.
- Debt maturities, borrowing costs and liquidity after the 2016 note issuances, land investment, acquisition spending and shareholder returns.
- Realization of deferred tax assets and outcomes of tax, construction-defect and other legal contingencies.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting.