PHM

Business Context and Reporting Period

This Form 10-Q covers Pulte Homes, Inc. (now PulteGroup Inc.) for the quarterly and nine-month periods ended September 30, 2001. The Company operates primarily in homebuilding (Domestic and International) and financial services (mortgage banking). A defining event for this period was the acquisition of Del Webb Corporation on July 31, 2001, a stock-for-stock transaction that significantly expanded the Company's footprint, particularly in the active adult housing market.

Key Financial Metrics

Note: All figures in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 18.6% year-over-year, driven by a 18.2% increase in Homebuilding revenues ($3.33 billion vs. $2.82 billion) and a 47.8% increase in Financial Services revenues.
• Profitability: Net income rose 76.8% to $181.95 million. This surge is largely attributable to the inclusion of Del Webb's operations and improved domestic gross margins (20.1% vs. 18.4% prior year).
• Balance Sheet Expansion: Total assets nearly doubled to $5.72 billion, primarily due to the acquisition of Del Webb, which added significant land inventory ($1.56 billion) and goodwill ($255.9 million).
• Debt Levels: Long-term debt increased significantly to $1.89 billion, reflecting the assumption of Del Webb's debt and the issuance of $500 million in new Senior Notes in August 2001.
• Discontinued Operations: The Company reported a loss from discontinued operations of $0.94 million for the nine months ended Sep 30, 2001, compared to a loss of $29.87 million in the prior year. The prior year loss included a $30 million reserve for FDIC-related litigation, which was settled in October 2001.

Guidance, Outlook, and Risks

• Acquisition Integration: Management expects the Del Webb acquisition to strengthen the Company's position in active adult housing and provide economies of scale. Pro forma results indicate the acquisition would have increased 2000 net income by approximately 40%.
• Accounting Changes: The Company will adopt SFAS No. 142 in 2002, which eliminates goodwill amortization. This is expected to increase net income by approximately $4.1 million annually. The first impairment test for goodwill will occur in 2002.
• Liquidity: The Company maintains $560 million in unsecured revolving credit facilities, with $61.5 million utilized as of September 30, 2001. Management anticipates adequate mortgage financing availability for homebuyers.
• Risks and Contingencies:
  • FDIC Litigation: Settled in October 2001 for a payment of $41.5 million, extinguishing prior obligations. A separate Court of Federal Claims case regarding tax benefits remains pending, with the Company seeking approximately $60 million in damages.
  • Market Risks: Exposure to interest rate fluctuations, inflation (affecting land and construction costs), and changes in economic conditions.
  • International Operations: International homebuilding (Mexico, Puerto Rico, Argentina) reported pre-tax losses in 2001 due to slowed mortgage funding in Mexico and start-up costs in Argentina.

Investor Verification Checklist

• Del Webb Integration: Verify the actual realization of synergies and the successful integration of Del Webb's active adult communities into Pulte's operations.
• Goodwill Impairment: Monitor the results of the first annual goodwill impairment test required under SFAS No. 142 in 2002, given the significant $255.9 million goodwill recorded from the Del Webb deal.
• FDIC Litigation Outcome: Track the resolution of the Court of Federal Claims case regarding the $60 million tax benefit claim.
• Inventory Levels: Assess the Company's ability to convert the significantly increased land inventory ($2.96 billion) into sales, particularly in light of the $418.9 million cash outflow for operating activities.
• Debt Servicing: Review the impact of the increased debt load ($1.89 billion) on interest coverage ratios and future cash flows.