PulteGroup, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are to Q1 2010 unless noted. PulteGroup operates homebuilding businesses across the U.S. and mortgage and title services. Dollar figures below are in millions unless otherwise indicated.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $805.2 | $1,020.4; down 21% |
| Home sale revenue | $782.5 | $976.8; down 20% |
| Homebuilding pretax loss | $(40.8) | $(11.8) |
| Financial Services pretax income | $1.0 | $5.5 |
| Consolidated pretax loss | $(45.4) | $(14.5) |
| Net loss / diluted loss per share | $(39.5) / $(0.10) | $(12.5) / $(0.03) |
| Home sale gross margin | 12.5% | 13.0%; adjusted measure was 16.9% versus 16.3% |
| Cash from operating activities | $(159.0) | $677.6 |
| Cash and equivalents at quarter-end | $1,292.9 | $1,470.6 at Dec. 31, 2010 |
| Senior notes, carrying value | $3,381.0 | $3,391.7 at Dec. 31, 2010 |
| Total assets / shareholders’ equity | $7,516.6 / $2,100.1 | $7,699.4 / $2,135.2 at Dec. 31, 2010 |
Unit settlements fell 17% to 3,141 and average selling price declined 3% to $249,000. Net new orders were 4,345 units, up slightly as reported but down 9% after adjusting for a change in order-recognition policy. Quarter-end backlog was 5,188 units, down 20% year over year, valued at $1.368 billion. Cancellation rate improved to 16% from 18%.
Operating cash flow swung to an outflow, reflecting the net loss, $109.7 million of cash collateral for letter-of-credit arrangements, and use of internal funds for mortgage lending. Q1 2010 operating cash flow included $786.2 million of net income-tax refunds, compared with $2.9 million of net tax refunds in Q1 2011. The company reported debt-to-total-capitalization of 61.7%, or 48.2% net of cash and restricted cash.
Material changes and unusual items
- Homebuilding revenue declined as settlements and average selling prices fell; management cited the expired federal homebuyer tax credit, fewer active communities, and weak housing demand. Active communities were 800 versus 842 a year earlier.
- Reported home-sale gross margin eased to 12.5%. Management’s adjusted margin, excluding land/community adjustments, capitalized-interest amortization, and merger-related costs, improved to 16.9% from 16.3%; this is a non-GAAP measure.
- SG&A declined 10% in dollars but rose to 17.4% of home-sale revenue from 15.4%, as lower sales more than offset cost reductions. Financial Services revenue fell 30%, and pretax income declined with mortgage volumes and the disposal of retail title operations acquired with Centex.
- Land and community valuation adjustments were $0.1 million versus $4.5 million; land held-for-sale write-downs were zero versus $0.6 million. Deposit and pre-acquisition cost write-offs were $0.6 million.
- Other expense was $3.9 million versus $8.4 million of other income in Q1 2010, primarily reflecting different developments in contingencies. The company recorded a $1.3 million charge for unamortized costs when it terminated its unused $250 million revolving credit facility.
- The company repaid $13.9 million of senior notes at maturity. It replaced the terminated facility’s letter-of-credit capacity with separate cash-collateralized arrangements; these had $109.7 million outstanding and an equal amount of restricted cash at quarter-end.
Outlook, risks, and contingencies
Management said it did not anticipate a broad homebuilding recovery in 2011 and emphasized limited visibility. It believed improved gross margins, higher volumes, and overhead leverage could support profitability in the second half of 2011; this was an expectation, not formal earnings guidance. Management cited Q1 net new orders above expectations and relative stability in market conditions, while continuing to focus on cost control, affordable product offerings, and selective land investment. It said current liquidity and borrowing resources were adequate for foreseeable needs, but did not expect prior levels of positive cash flow to continue.
- Key market risks include unemployment and weak consumer confidence, foreclosures, mortgage rates and lending standards, housing affordability, and possible financial-services or mortgage-market reforms. Management warned that market deterioration or changed community plans could trigger significant future inventory or goodwill impairments.
- Of $240.5 million of goodwill, $228.0 million related to reporting units identified as at increased risk of future impairment. Net deferred tax assets of $2.6 billion were fully offset by valuation allowances.
- Mortgage-loan representation-and-warranty liabilities were $82.5 million at quarter-end. The company said future losses could exceed estimates amid uncertainty about claims on loans sold, particularly loans originated in 2006–2007.
- Self-insurance reserves were $804.1 million. Management noted uncertainty in construction-defect claim frequency, severity, timing, and recoveries. Outstanding letters of credit and surety bonds totaled $1.6 billion.
- Gross unrecognized tax benefits were $248.6 million, plus $47.9 million of accrued penalties and interest. Tax examinations were ongoing; a decrease of up to $104.7 million in unrecognized benefits within twelve months was considered reasonably possible.
- Litigation and regulatory matters remain subject to uncertain outcomes; management did not expect current matters to have a material adverse impact but noted additional charges could be significant. A joint-venture litigation settlement was executed in March 2011 and was not material to the company.
Important facts for investors to verify
- Whether orders, settlements, backlog, cancellation rates, and pricing support the expected second-half improvement, particularly after adjusting for the 2010 order-policy change.
- Cash use and liquidity, including restricted cash, collateral requirements, mortgage funding needs, and the effect of the revolving-facility termination.
- Homebuilding gross-margin trends and the degree to which adjusted margins translate into GAAP results and sustained profitability.
- Adequacy of mortgage repurchase, self-insurance, litigation, and other contingency reserves, and any changes in claims or settlements.
- Potential land inventory and goodwill impairments, deferred-tax-asset valuation allowances, and outcomes of tax examinations.