PulteGroup, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Dollar amounts below are in millions unless otherwise noted. PulteGroup is a U.S. homebuilder with mortgage banking and title operations.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1,279.4 | $1,069.4 | $2,442.2 | $1,950.4 |
| Income before taxes | $38.3 | $39.9 | $120.7 | $26.4 |
| Net income | $36.4 | $42.4 | $118.2 | $30.8 |
| Diluted EPS | $0.09 | $0.11 | $0.30 | $0.08 |
| Operating cash flow | Not separately stated for the quarter | $335.1 | $211.5 |
- Q2 homebuilding revenue increased 20% to $1,240.1 million; home-sale revenue rose 19%, reflecting 9% more closings and a 9% higher average selling price. Six-month homebuilding revenue increased 25%.
- GAAP home-sale gross margin was 18.8% in Q2 and 18.4% for the first half, compared with 15.1% and 14.0% in 2012. Management’s adjusted, non-GAAP margins were 23.9% and 23.4%, respectively, versus 20.3% and 19.6%.
- Q2 pretax income was slightly lower year over year despite higher sales and margins, primarily due to $66.6 million of unusual charges. First-half net income increased substantially from the prior-year period.
- Six-month Financial Services revenue rose 17% to $76.2 million and pretax income rose 34% to $30.7 million. Q2 Financial Services pretax income was $16.4 million, up 2%.
Liquidity, debt, and capital
- At June 30, cash and equivalents were $1,212.7 million, restricted cash was $66.4 million, and senior notes were $2,082.1 million. Financial Services debt was $59.9 million. Shareholders’ equity was $2,328.2 million.
- Senior-note carrying value fell from $2,509.6 million at year-end 2012. In Q2, the company retired $434.4 million of notes ahead of maturity, including the remaining 2014 notes, and recorded a $23.1 million loss on retirement.
- First-half operating cash flow was $335.1 million; investing activities used $7.4 million and financing activities used $519.8 million. Cash declined by $192.1 million to $1,212.7 million, principally reflecting debt retirement and repayment of Financial Services borrowings.
- Management reported debt to total capitalization of 47.2%, or 25.6% net of cash and equivalents including restricted cash. It believes current operations and borrowing resources can meet current and foreseeable capital requirements.
- After quarter-end, the company declared its first quarterly dividend since 2008: $0.05 per share, payable in August 2013. It also increased its share-repurchase authorization by $250 million to $352.3 million available; no purchases had been made under authorized programs since 2006.
Business trends, outlook, and notable items
- Management described the U.S. housing recovery as strengthening, citing demand, pricing, and backlog improvements. It noted that rising interest rates could moderate demand and pricing, while higher material and labor costs could pressure margins.
- Closings increased 9% in Q2 and 15% in the first half. Backlog at June 30 increased 13% in units to 8,558 and 25% in value to $2,713.7 million year over year.
- Net new orders fell 12% in Q2 and 5% in the first half, partly because active communities were down 16% to 626. Orders per community increased 4% in Q2 and 12% in the first half. Management said it may deliberately slow sales in some communities to improve pricing and align sales with production.
- Unsold homes in production were 45% below the prior-year level. The company said it would continue controlling speculative inventory, making more effective use of land, and pursuing margin improvement; it provided no specific earnings or revenue forecast in the supplied filing text.
- The planned corporate relocation from Michigan to Atlanta is expected to be substantially complete by early 2015. Estimated costs are $21–26 million for employee-related costs, $0.4–0.5 million for asset impairments, and $27–32 million for lease termination and other exit costs. The company recorded $13.1 million of employee-related costs and $0.4 million of impairments in Q2, and expected another $1–5 million of charges in 2013.
- A contractual dispute involving a previously completed luxury community resulted in a $30 million Q2 charge. The company said losses could be up to $40 million above amounts previously accrued.
- Mortgage-loan repurchase and make-whole liabilities were $154.4 million at June 30, with no new reserves provided in the first half. Management cautioned that future losses could exceed current estimates. General-liability and other insurance reserves totaled $708.1 million, largely including estimates for claims incurred but not reported.
- The company had $2.5 billion of net deferred tax assets fully reserved by a valuation allowance. Management said continued profitability and industry improvement could provide sufficient positive evidence to support reducing a large portion of the allowance in the second half of 2013; this was conditional, not a guarantee.
- Other exposures include approximately $1.0 billion of surety bonds, $171.6 million of letters of credit, and $1.3 billion of remaining purchase price under land options. Management stated it did not expect a material amount of letters of credit or surety bonds to be called.
Most important facts for investors to verify
- Whether revenue, backlog, pricing, and gross-margin gains continue, particularly given lower order counts and fewer active communities.
- Whether rising mortgage rates, construction costs, labor availability, or local-market weakness affect demand, pricing, and margins.
- Actual costs and timing of the Atlanta relocation, and the ultimate resolution of the luxury-community dispute.
- Whether mortgage repurchase claims, insurance claims, or other legal contingencies require additional reserves or cash payments.
- Debt reduction and liquidity after the early note retirement, including renewal or replacement of Pulte Mortgage’s repurchase agreement, which expired in September 2013.
- Whether taxable profitability supports a deferred-tax valuation-allowance release, and whether the announced dividend and repurchase authorization are implemented as planned.