PulteGroup, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. PulteGroup is a U.S. homebuilder with mortgage banking and title operations. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1,280.3 | $1,286.2 | $2,413.6 | $2,405.1 |
| Income before tax | $167.6 | $67.7 | $263.4 | $197.7 |
| Net income | $103.3 | $41.9 | $158.3 | $116.7 |
| Diluted EPS | $0.28 | $0.11 | $0.43 | $0.30 |
- Q2 home sale revenue was essentially flat at $1,243.1 million. Closings declined 1% to 3,744, while average selling price rose 1% to $332,000.
- Home sale gross margin was 23.3% in Q2 and 23.0% for the first half, versus 23.6% and 23.7% in the comparable 2014 periods. Management cited community mix and higher land, labor, and material costs; lower amortized interest partly offset these pressures.
- Q2 net new orders rose 7% to 5,118 homes; first-half orders rose 6% to 10,257. June backlog increased 10% to 8,998 homes, valued at $3,087.9 million. Cancellation rates were 13% for Q2 and 12% for the first half.
- Six-month operating cash flow was negative $191.1 million, versus positive $74.3 million in 2014, primarily reflecting a $485.7 million inventory build. Investing cash use was $8.5 million; financing cash use was $632.9 million. Cash and equivalents fell to $460.4 million from $1,292.9 million at year-end.
- At June 30, senior notes were $1,583.6 million and Financial Services debt was $119.3 million. The company retired $238.0 million of senior notes at maturity during June. Debt to total capitalization, excluding Financial Services debt, was 25.6%. The $500 million revolving facility had no borrowings outstanding and $193.4 million of letters of credit; the company reported covenant compliance.
- Shareholders’ equity was $4,606.3 million. First-half share repurchases totaled $313.0 million and dividends declared totaled $58.2 million; $425.4 million of repurchase authorization remained at June 30.
Changes versus the prior comparable period
- Reported Q2 net income increased to $103.3 million from $41.9 million, while revenue edged down. The comparison is materially affected by unusual items: 2015 included a $26.9 million legal-settlement reserve reversal; 2014 included an $84.5 million increase in insurance reserves and $3.7 million of headquarters-relocation costs.
- For the first half, 2014 also included $8.6 million of debt-retirement losses and an $18.6 million reduction in Financial Services loan-origination liabilities. Management said that excluding the cited items, Homebuilding pretax income declined in 2015, mainly due to slightly lower gross margins and higher overhead on similar volume.
- Q2 Financial Services pretax income rose 10% to $10.0 million; first-half income fell 51% to $15.0 million, primarily because of the prior-year $18.6 million liability reduction.
- Home sale gross margin declined 30 basis points in Q2 and 70 basis points for the first half. Orders and backlog grew, but closings were down 1% in Q2 and 2% year to date.
Outlook, risks, and contingencies
- Management remained optimistic about a slow, sustained housing recovery, citing employment, demographics, low mortgage rates, and limited available-home inventory. It expected to open approximately 200 communities in 2015 and operate approximately 600–620 communities. No numerical earnings or revenue guidance was provided.
- Management flagged entitlement and land-development delays, adverse weather, and tight labor resources as challenges to the planned community openings. It also cited risks from mortgage rates and financing availability, land and construction costs, labor shortages, competition, regulation, and economic conditions.
- Cash flow is seasonal; management generally expects stronger operating cash flow in the fourth quarter, while the third and fourth quarters require working capital for homebuilding and mortgage activity. Higher inflation or mortgage rates could pressure affordability, margins, and earnings.
- Recorded reserves for insurance and other claims were $700.1 million at June 30, mostly for general liability claims; outcomes and ultimate costs are uncertain. Mortgage loan-origination liabilities were $58.2 million. Certain Centex-related RMBS indemnification exposure could not yet be quantified, although management did not expect a material adverse impact.
- Remaining purchase price under land options was $2.2 billion, generally subject to cancellation at the company’s discretion; related deposits and pre-acquisition costs were $147.1 million. Outstanding letters of credit and surety bonds were $193.4 million and $999.1 million, respectively; management did not expect material drawings.
- Net deferred tax assets were $1,617.6 million; their realization depends on future taxable income. The company was under IRS and state tax examinations and reported $32.9 million of gross unrecognized tax benefits.
Important facts for investors to verify
- How much of the reported earnings improvement reflects the legal-settlement reversal and prior-year reserve, relocation, and debt-retirement charges, versus underlying operating performance.
- Whether order and backlog growth converts into closings without further pressure on gross margins, especially given regional weakness and higher input costs.
- Whether the inventory and land investment build supports planned community growth and when operating cash flow may recover from the first-half outflow.
- The adequacy and sensitivity of the $700.1 million claims reserves, mortgage repurchase liabilities, and deferred tax asset valuation to future experience and assumptions.
- Execution of the 2015 community-opening plan amid weather, entitlement, development, and labor constraints, and the terms or renewal of Pulte Mortgage’s repurchase agreement, which was due to expire in September 2015.