PulteGroup, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise. The unaudited interim statements should be read alongside the company’s 2009 Form 10-K.
Business context
PulteGroup builds homes across U.S. markets and also provides mortgage and title services. Its results include Centex from the August 18, 2009 acquisition, making prior-year comparisons materially affected by the merger. The company said the second-quarter federal homebuyer tax credit supported revenue, while its expiration contributed to weaker industry order trends in May and June.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $1,305.9 | $678.6 | $2,326.3 | $1,262.5 |
| Pre-tax income (loss) | ($5.7) | ($186.9) | ($20.2) | ($699.2) |
| Net income (loss) | $76.3 | ($189.5) | $63.8 | ($704.3) |
| Diluted earnings (loss) per share | $0.20 | ($0.74) | $0.17 | ($2.77) |
- Revenue and operations: Q2 home sale revenue was $1,263.0 million, up 93%; six-month home sale revenue was $2,239.8 million, up 84%. Centex contributed approximately $615 million and $1.1 billion, respectively. Homebuilding pre-tax income was $11.8 million in Q2, its first profitable quarter since Q3 2006, but approximately breakeven for the first half.
- Margins and costs: Homebuilding home-sale gross margin was 12.6% in Q2 and 12.7% for the first half, versus negative 10.9% and negative 33.2% in 2009. Land and community valuation charges declined to $25.5 million in Q2 and $30.1 million in the first half, from $109.2 million and $467.8 million. SG&A was 11.7% of home sale revenue in Q2 and 13.3% in the first half, improved from 17.5% and 19.2%.
- Cash flow: Operating cash flow was $850.1 million for the first half, compared with $400.0 million in 2009. The company received $881.6 million in federal tax refunds; excluding these refunds, management said first-half operating cash flow was slightly negative. Cash and equivalents rose to $2,746.6 million from $1,858.2 million at year-end 2009. Investing cash outflow was $24.1 million; financing cash inflow was $62.4 million.
- Debt and liquidity: Senior notes totaled $4,284.8 million; collateralized short-term debt was $75.4 million. No borrowings were outstanding under the revolving credit facility, with $404.5 million available after outstanding letters of credit. Debt-to-total capitalization was 56.6%, or 31.9% net of cash. The company was in covenant compliance; its credit-agreement debt-to-tangible-capital ratio was 51.0% against a 60.0% maximum.
- Other key measures: Q2 settlements were 5,030 units; net new orders were 4,218 units; and June 30 backlog was 5,644 homes valued at $1,577 million. Average selling price was $251,000 in Q2, down from $261,000. Results and order comparisons include Centex; excluding it, management said orders decreased significantly.
Material changes versus prior periods
- Revenue growth primarily reflects Centex and higher settlements, not solely organic improvement. Six-month 2010 home sale revenue, settlements, and net new orders were down 12%, 14%, and 29%, respectively, versus the combined prior-year results of Pulte and Centex.
- Profitability improved substantially with higher gross margins, lower land-related charges, and reduced duplicative overhead. The improvement was partly offset by casualty insurance claims of $9.6 million in Q2 and $19.6 million in the first half.
- Net income included substantial income tax benefits: the company reported an $82.0 million Q2 tax benefit and an $84.0 million first-half benefit; favorable resolution of federal and state tax matters generated a total $87.4 million benefit. Thus, reported net income exceeded pre-tax results despite a pre-tax loss.
- Goodwill was $895.5 million at June 30. Management identified $543.9 million as associated with reporting units at increased risk of future impairment. The company recorded a further $1.4 million goodwill impairment in the first half.
Outlook, risks, and contingencies
- Management described the outlook for the remainder of 2010 as cautious, with limited visibility into future earnings. No numerical earnings or revenue guidance was provided.
- Risks cited include tax-credit expiration, high unemployment and foreclosures, mortgage-rate and lending-standard changes, weak demand and pricing, economic and financial-market volatility, and possible constraints on customer financing or the company’s capital access.
- Further land or goodwill impairments could be significant if market conditions worsen or community strategies change. The company had incurred $5.2 billion of land-related charges and $940 million of goodwill impairments since the start of 2006.
- Mortgage loan repurchase liabilities were $103.2 million, with management warning that actual future losses may exceed estimates. Self-insured reserves were $577.7 million. Outstanding letters of credit and surety bonds totaled $1.9 billion; separate surety bonds of approximately $1.1 billion relate to the former Centex commercial construction business, with less than $150 million of work remaining and stated indemnity protections.
- A joint-venture lender lawsuit concerns a completion guaranty; the company said it believes it has meritorious defenses, but potential exposure could reach its proportionate share of approximately $52.2 million of pre-foreclosure principal and accrued interest. Management did not expect other litigation to have a material adverse effect.
- Mortgage repurchase agreements with $105 million total capacity expire in September 2010. The company said it could not assure renewal or replacement on commercially reasonable terms, but believed it had adequate liquidity for mortgage financing needs.
Important facts for investors to verify
- How much of revenue, settlements, backlog, and future earnings reflects Centex versus comparable legacy operations.
- Whether orders and cancellation rates remain weak after the homebuyer tax credit, and whether backlog converts to completed sales at expected prices and margins.
- The sustainability of operating cash flow after the unusually large tax refunds, and the amount of cash effectively available after required liquidity reserves.
- Debt maturities, revolving-credit availability and covenant headroom, including the effect of restricted borrowing-base terms and September 2010 mortgage-facility expirations.
- Potential additional land and goodwill impairments, mortgage repurchase claims, self-insurance reserve adequacy, and joint-venture guaranty exposure.
- The basis and repeatability of the tax benefit and the company’s ability to realize deferred tax assets; $2.3 billion of net deferred tax assets remained offset by valuation allowances.