PulteGroup, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. PulteGroup is a U.S. homebuilder with mortgage banking, title, and insurance brokerage operations. Financial amounts below are in U.S. dollars; “$ million” is used for readability.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $2,955 million | $2,710 million | $7,844 million | $7,196 million |
| Income before taxes | $484 million | $366 million | $1,205 million | $904 million |
| Net income | $416 million | $273 million | $969 million | $681 million |
| Diluted EPS | $1.54 | $0.99 | $3.56 | $2.44 |
| Home-sale gross margin | 24.5% | 23.1% | 24.1% | 23.2% |
| Homebuilding pretax income | $420 million | $334 million | $1,061 million | $834 million |
| Financial Services pretax income | $64 million | $32 million | $144 million | $70 million |
- Quarterly total revenue rose 9%, net income 52%, and diluted EPS 56% year over year. For the nine-month period, revenue increased 9% and net income 42%.
- Home-sale revenue was $2,824 million in Q3, up 7%; closings increased 4% and average selling price increased 3%. For nine months, home-sale revenue rose 8%, primarily from 8% more closings, while average selling price declined 1%.
- Homebuilding SG&A was 9.6% of home-sale revenue in Q3 versus 10.3% a year earlier; for nine months, 9.7% versus 11.2%.
- Net cash provided by operating activities was $1,269 million for the first nine months, compared with $583 million in 2019. Investing activities used $109 million and financing activities used $297 million.
- At September 30, cash, cash equivalents, and restricted cash totaled $2,114 million, including $2,067 million unrestricted. The company reported $749 million of available revolving-credit capacity after letters of credit.
- Notes payable were $2,779 million and Financial Services debt was $249 million. The revolving credit facility had no borrowings outstanding. Homebuilding debt to total capitalization, excluding Financial Services debt, was 30.8%, versus 33.6% at year-end 2019.
- Shareholders’ equity was $6,240 million, up from $5,458 million at December 31, 2019. House and land inventory was $7,615 million, down from $7,681 million.
Material changes and operating trends
- Net new orders increased 36% in Q3 to 8,202 homes and 15% for the first nine months to 22,219 homes. The cancellation rate was 12% in Q3 versus 15% a year earlier.
- September 30 backlog was 14,962 homes, up 29%, with a value of $6,598 million, up 32%, year over year.
- Management said demand rebounded sharply beginning in June and remained strong through September. It cited low mortgage rates, limited housing supply, pent-up demand, and buyer interest in single-family homes.
- Financial Services benefited from higher origination volumes, an improved capture rate (86.5% versus 81.6% for nine months), and improved margins per loan. Mortgage originations were 13,202 loans for nine months, up 20%.
- Results included a $20.2 million first-quarter goodwill impairment related to the ICG acquisition and $10.4 million of severance expense in the first half. Nine-month results also included a $59.4 million reduction in general-liability reserves, compared with an $18.3 million reduction in 2019.
- The effective tax rate was 14.0% for Q3 and 19.6% for nine months, versus 25.4% and 24.6%, respectively, in 2019. 2020 tax expense reflected federal energy-efficient-home tax-credit benefits of $53.2 million for Q3 and $58.0 million for nine months.
Outlook, risks, and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management said construction and manufacturing operations were functioning at effectively full capacity, but supply-chain delays had lengthened production cycles in some markets.
- Labor and materials costs, particularly lumber, were under pressure. Management believed pricing could offset most of the increases, but noted this was not assured.
- COVID-19 remained a material uncertainty. A resurgence or renewed restrictions could disrupt sales, construction, mortgage operations, and deliveries; weaken demand; increase cancellations; and lead to lower prices, reduced cash flow, or inventory and land-option impairments. Management said there was no reliable estimate of the pandemic’s duration or severity.
- Land-option agreements had $3.7 billion of remaining purchase commitments and $290 million of deposits and pre-acquisition costs at quarter-end. These agreements generally may be canceled, but cancellation could result in write-offs.
- Outstanding letters of credit were $251 million and surety bonds approximately $1.5 billion. The company did not expect a material amount to be drawn. It also disclosed ongoing litigation and mortgage-loan representation-and-warranty claims; recorded liabilities for the latter were $11.9 million. General-liability reserves were $653 million and depend on uncertain long-term claims estimates.
- The company drew $700 million on its revolving facility as a precaution in March and repaid it in June. It reported compliance with facility covenants at September 30. A $426 million senior-note maturity was scheduled for March 2021.
- Share repurchases were suspended in March and reinstated in October 2020. The company repurchased $95.7 million of shares during the first nine months and had $429.9 million of authorization remaining at quarter-end.
Important facts for investors to verify
- Whether strong order growth and the 32% backlog-value increase translated into closings without material cancellations or delivery delays.
- Whether labor, lumber, and supply-chain costs affected margins despite management’s expectation that pricing would offset most cost increases.
- The sustainability of results after accounting for the $59.4 million insurance-reserve release, tax-credit benefits, severance expense, and goodwill impairment.
- Liquidity and debt capacity around the March 2021 $426 million note maturity, including the status of revolving-credit availability and covenants.
- Changes in COVID-19 conditions, land-option exposure, warranty and general-liability reserves, and pending legal or mortgage-loan claims.