Business Context and Reporting Period
Company: Pulte Corporation (PulteGroup Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: Pulte is a diversified homebuilding and financial services company. Its primary segments are Homebuilding (Domestic, International, and Active Adult), Financial Services (Mortgage Banking), and Corporate. The company is in the process of liquidating its former thrift subsidiary, First Heights Bank, which is reported as a discontinued operation.
Key Financial Metrics
| Metric ($000s omitted) | Three Months Ended Sep 30, 1999 |
Nine Months Ended Sep 30, 1999 |
Nine Months Ended Sep 30, 1998 |
|---|---|---|---|
| Total Revenues | $973,117 | $2,489,736 | $1,959,602 |
| Net Income | $47,094 | $108,540 | $63,661 |
| Diluted EPS | $1.07 | $2.47 | $1.45 |
| Cash and Equivalents | $30,587 | (Balance Sheet Data) | |
| Total Assets | $2,619,100 | ||
| Total Liabilities | $1,595,000 | (Balance Sheet Data) | |
| Shareholders' Equity | $1,024,100 | ||
| Operating Cash Flow (9mo) | $(89,933) Used |
Homebuilding Margins: Domestic gross profit margins improved to 17.9% for the quarter and 17.4% for the nine-month period, compared to 16.0% and 15.7% in the prior year periods, respectively.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 28% for the quarter and 27% year-to-date compared to 1998. Homebuilding revenues drove this growth, rising 29% for the quarter and 28% year-to-date.
- Profitability: Net income from continuing operations increased 67% for the quarter and 72% year-to-date. Pre-tax income for the Homebuilding segment increased 74% for the quarter and 68% year-to-date.
- Operational Volume: Domestic unit settlements increased 18% for the quarter and 20% year-to-date. Net new orders for the nine months increased 9% to 15,309 units.
- Backlog: Total backlog at September 30, 1999, reached 7,622 units (approx. $1.5 billion), a 16% increase over the prior year.
- Cash Flow: Operating cash flow turned negative ($89.9 million used) for the nine months ended September 30, 1999, compared to positive $87.0 million provided in 1998. This was primarily due to a $344.5 million increase in inventory levels (land purchases) and other assets.
- Debt Structure: The company redeemed $22.4 million of senior subordinated debentures in the third quarter. Unsecured short-term borrowings increased to $150 million under a revolving credit facility.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Market Conditions: Management cites strong customer demand, favorable economic conditions, and positive home pricing as drivers for improved margins and settlement activity.
- Active Adult Acquisition: Effective July 1, 1999, Pulte acquired the remaining 50% interest in its Active Adult joint venture from Blackstone Real Estate Advisors for $26 million. This segment is now fully consolidated. Management notes that gross margins in this segment will be temporarily impacted by acquisition accounting adjustments through the first half of 2000.
- Tax Rate: The estimated effective tax rate for 1999 was revised down to 37.5% (from 39-40%) due to favorable state tax resolutions. The rate is expected to increase to 38.5% in 2000.
- Liquidity: Management anticipates funding working capital requirements through internally generated funds and existing credit facilities ($415 million unsecured revolving credit facility and $60 million secured line).
Risks and Contingencies
- FDIC Litigation (First Heights): A significant legal contingency exists regarding the former thrift subsidiary. A District Court judgment requires Pulte subsidiaries to pay the FDIC approximately $221.3 million. Pulte has appealed this decision and posted an $110 million bond. Management estimates a potential after-tax charge of approximately $88 million if the judgment is upheld, but believes the appeal has a strong basis.
- Year 2000 Compliance: The company is in the final phase of implementing new financial systems to address Y2K risks. While management does not expect a material impact on operations, they have contingency plans for manual processing if systems fail.
- Interest Rate Risk: The company is exposed to interest rate fluctuations on its long-term debt and mortgage banking operations. Pulte Mortgage hedges its pipeline using derivative instruments.
- Foreign Currency: Operations in Mexico are exposed to currency risk. A hypothetical 1% monthly devaluation of the peso could result in a $1.2 million loss on the $39.7 million net investment.
Investor Verification Checklist
- FDIC Litigation Outcome: Verify the status of the appeal regarding the $221.3 million judgment against the First Heights subsidiary and the potential impact on future earnings.
- Inventory Levels: Confirm the sustainability of the $344.5 million increase in inventory (land and homes) and its impact on future cash flow requirements.
- Active Adult Margins: Monitor the Active Adult segment's gross margins in upcoming quarters to assess the duration and magnitude of the acquisition accounting adjustments.
- Debt Covenants: Review the terms of the $415 million revolving credit facility and the $60 million secured line to ensure compliance with covenants given the current debt levels.
- Y2K System Rollout: Confirm the successful completion of the new financial accounting system rollout scheduled for November 30, 1999.