PHM

Business Context and Reporting Period

This Form 10-Q covers Pulte Corporation for the quarterly period ended March 31, 1996. The Company operates primarily through two continuing segments: Homebuilding (Pulte Home Corporation) and Financial Services (Mortgage banking via ICM Mortgage Corporation and financing via Pulte Financial Companies, Inc.). The Company also maintains Discontinued Operations related to its former thrift subsidiary, First Heights Bank, fsb, which is in the process of liquidation and wind-down.

Key Financial Metrics

Segment Performance (Pre-Tax Income):

• Homebuilding: $7.3 million (vs. $(3.1) million loss in 1995).
• Financial Services: $4.8 million (vs. $6.5 million in 1995).
• Corporate: $(3.5) million loss (vs. $(4.2) million loss in 1995).
• Discontinued Operations: $2.0 million net income (vs. $3.9 million in 1995).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 30% year-over-year, driven primarily by a 34% increase in homebuilding revenues ($413.2 million vs. $308.6 million).
• Profitability Turnaround: The Homebuilding segment returned to profitability, posting a $7.3 million pre-tax income compared to a $3.1 million loss in Q1 1995. This was driven by a 35% increase in unit settlements (2,732 units) and a 32% increase in net new orders (4,251 units).
• Financial Services Decline: Pre-tax income from Financial Services dropped 26% to $4.8 million. This decrease is largely attributable to the absence of a $9.3 million gain on the sale of mortgage servicing rights recorded in Q1 1995. Under new accounting standards (SFAS No. 122), such gains are now recognized upon loan sale rather than servicing sale.
• Cash Position: Cash and equivalents decreased by approximately $117.4 million during the quarter, primarily due to increased inventory investment ($61.1 million) and significant debt repayments ($60.8 million) and stock repurchases ($9.3 million).
• Backlog: Homebuilding backlog reached a record 5,218 units ($876 million), up from 3,483 units ($582 million) in the prior year.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the strong homebuilding performance to positive responses to new product offerings and contributions from new markets entered in 1994 and 1995. The average selling price remained stable at $151, though product mix shifted toward more affordable units in certain regions due to weather-related delays on the East Coast.

Liquidity and Capital Resources: The Company maintains a $250 million unsecured revolving credit facility (currently unutilized) and $250 million in committed lines for its mortgage subsidiary. Management anticipates funding working capital needs through internally generated funds and existing debt facilities. A universal shelf registration allows for up to $125 million in additional debt or equity securities.

Stock Repurchases: The Company completed the repurchase of 1 million shares authorized in late 1994 and authorized two additional 1 million share repurchase programs in March and April 1996. Subsequent to the quarter-end, 1.39 million shares were repurchased for $35.9 million.

Risks and Contingencies:

• FDIC Litigation: The Company is involved in litigation with the FDIC regarding the interpretation of an assistance agreement related to the former First Heights Bank. The dispute concerns the sharing of tax benefits. The Company believes a loss, if any, would not be material, but the resolution is uncertain and could impact the final liquidation of discontinued operations.
• Market Conditions: Gross profit margins in homebuilding remain under pressure from competitive market conditions, particularly in the North and West regions.

Investor Verification Checklist

• Discontinued Operations Resolution: Verify the status of the FDIC litigation and the timeline for the final liquidation of First Heights Bank assets, as this impacts future tax benefits and cash flows.
• Inventory Levels: Confirm the valuation of the $920.8 million house and land inventory, given the significant increase in inventory investment during the quarter.
• Mortgage Servicing Accounting: Review the impact of SFAS No. 122 on future earnings recognition for the mortgage banking segment, as gains are now recognized differently than in prior periods.
• Debt Maturities: Monitor the repayment schedule for the $164.8 million in mortgage-backed bonds, which are expected to be redeemed by late 1996.
• Stock Repurchase Execution: Track the execution of the newly authorized 2 million share repurchase program and its impact on cash reserves.