PulteGroup, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unless stated otherwise, amounts are U.S. dollars. The statements are unaudited. PulteGroup acquired Centex in August 2009, so year-over-year comparisons are not fully comparable: 2010 includes Centex for the full periods, while 2009 includes it only from the merger date.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $1.058bn | $1.091bn | $3.384bn | $2.354bn |
| Net loss | $(995.1)m | $(361.4)m | $(931.3)m | $(1.066)bn |
| Diluted loss per share | $(2.63) | $(1.15) | $(2.46) | $(3.88) |
| Homebuilding gross margin on home sales | 7.0% | (2.5)% | 10.9% | (19.0)% |
| Operating cash flow | Not presented by quarter | $798.6m | $330.5m |
- Q3 revenue declined about 3% year over year; nine-month revenue rose about 44%, substantially reflecting Centex. Q3 home-sale revenue was down 3%, with settlements down 7% and average selling price up 5%.
- Q3 losses worsened, principally due to a $654.9m goodwill impairment and $272.2m of additional insurance expense. The nine-month loss improved from 2009, despite $656.3m of goodwill impairment in 2010.
- Reported homebuilding margins improved substantially year over year. Management said margins also improved excluding land/community charges and capitalized-interest amortization, though they eased slightly from Q2 on lower volume.
- Q3 SG&A was $425.6m, including the $272.2m insurance charge; SG&A equaled 40.7% of home-sale revenue. Excluding that charge, management reported improved overhead leverage.
- Financial Services recorded pretax income of $3.5m in Q3 and $0.4m for nine months, versus losses of $8.6m and $18.7m in the respective 2009 periods. Nine-month loan originations were $1.674bn, up from $1.370bn.
Balance sheet, debt and liquidity
- At September 30, cash and equivalents were $2.623bn, up from $1.858bn at year-end 2009; total assets were $9.093bn and shareholders’ equity was $2.296bn.
- Senior notes had a carrying value of $4.286bn, versus $4.282bn at year-end; the company reported no borrowings under its revolving credit facility. Debt-to-total capitalization was 65.1%, or 42.0% net of cash.
- Revolver availability was $447m after $303m of letters of credit. The company maintained $519.9m in required liquidity reserve accounts; its trailing 12-month interest coverage ratio was negative 0.7. It reported compliance with credit-facility covenants, including a 55.0% debt-to-tangible-capital ratio against a 60.0% maximum and a $631.8m tangible-net-worth cushion.
- Nine-month operating cash flow included $881.6m in federal tax refunds. Management stated that, excluding refunds, operating cash flow was slightly negative. Cash used in investing was $19.3m; cash used in financing was $14.3m.
- Inventory was $4.921bn, broadly flat with year-end 2009. Senior-note fair value was approximately $4.209bn. Pulte Mortgage allowed third-party borrowing agreements to expire and was funding lending operations with company resources.
Operating trends and changes versus prior periods
- Q3 net new orders declined 12% to 3,566 units; nine-month orders increased 16% to 12,104 units, with the merger and first-half homebuyer tax credit contributing to the increase. Q3 cancellations were 19%, versus 23% a year earlier.
- Backlog at quarter-end was 5,345 homes, down 36% year over year; backlog value was $1.446bn, versus $2.197bn. Active communities declined 17% to 796.
- Management attributed post-tax-credit market softness to weak demand. Excluding Centex, new orders and settlements declined significantly year over year. The company controlled 149,253 lots, down from 154,694 at year-end.
- Land and community valuation adjustments were $57.5m in Q3 and $87.5m for nine months, versus $132.6m and $600.4m in 2009. Goodwill fell from $895.9m at year-end to $240.5m after impairment charges and a disposal.
Outlook, risks and unusual items
- Management described its outlook for the remainder of 2010 and into 2011 as cautious, with limited visibility on future earnings. It said difficult housing-market conditions were expected to continue in the near term; no quantified earnings or revenue guidance was provided.
- Management cited high unemployment, foreclosures, mortgage availability and rates, FHA lending costs and standards, expiring stimulus, and potential financial-services reforms as risks to demand and financing. Further land or goodwill impairments could result if forecasts, market conditions, or strategy change.
- Remaining goodwill of $240.5m included $228.0m identified as at increased risk of future impairment. A hypothetical 10% decline in reporting-unit fair values would have caused an estimated additional impairment of about $159.9m.
- General-liability reserves were $782.8m, up from $513.0m at year-end; approximately 78% represented incurred-but-not-reported claims. The company warned actual claims could differ materially from estimates.
- Mortgage loan repurchase liabilities were $99.3m. The filing says losses may exceed current estimates, especially for loans originated in 2006–2007. A joint-venture completion-guaranty lawsuit presents potential exposure estimated at up to Pulte’s proportionate $52.2m pre-foreclosure share; management said it has defenses.
- The company had $1.8bn of outstanding letters of credit and surety bonds, plus about $1.4bn of surety bonds associated with Centex’s former commercial construction business. It estimated less than $125m of work remained and cited purchaser indemnification and a financial-institution back-up indemnity capped at $400m.
- After quarter-end, on October 21, 2010, PulteGroup completed a tender offer for $500m of senior notes due 2013–2015; it expected to record an approximately $27.8m loss in Q4. It also announced an intention to repurchase at least $50m of stock annually under existing authorization, subject to market conditions and other capital needs.
Important facts for investors to verify
- Whether the $272.2m Q3 insurance charge and the rise in general-liability reserves adequately reflect ultimate claim costs.
- How much of future operating cash flow depends on tax refunds, and the timing and realization of the remaining $136.8m tax receivable at quarter-end.
- The extent of additional goodwill and land impairments, particularly given $228.0m of goodwill flagged as at increased risk.
- Whether order trends, backlog, margins, and liquidity improve after expiration of the homebuyer tax credit; account for the Centex-related comparability differences.
- Compliance with credit-facility covenants and liquidity-reserve requirements, as well as the impact of the post-quarter $500m debt tender and its expected loss.
- Potential exposure from mortgage repurchase claims, the joint-venture guaranty litigation, and surety-bond obligations.