PulteGroup, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in millions of dollars unless stated otherwise. The filing is unaudited.
Business context
PulteGroup is a U.S. homebuilder with mortgage banking, title, and insurance brokerage operations. In Q2, management reported improved demand, higher community traffic, and increased new orders versus the prior-year quarter, attributing the improvement partly to lower mortgage rates and slower home-price appreciation. The company operated in 42 markets across 23 states and had 877 active communities at quarter-end.
Financial and operating metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $2,489 | $2,570 | $4,486 | $4,540 |
| Income before taxes | $321 | $409 | $537 | $633 |
| Net income | $241 | $324 | $408 | $495 |
| Diluted EPS | $0.86 | $1.12 | $1.45 | $1.71 |
| Home-sale gross margin | 23.1% | 24.0% | 23.3% | 23.8% |
| SG&A as % of home-sale revenue | 10.8% | 9.2% | 11.8% | 10.7% |
- Homebuilding: Q2 home-sale revenue was $2,404 million, down 2%; closings fell 3% to 5,589 while average selling price rose 1% to $430,000. Net new orders increased 7% to 6,792 units; the cancellation rate was 14%. Backlog was 11,793 homes, down slightly year over year, with a value of $5,109 million, down 2%.
- Financial Services: Q2 pretax income rose 21% to $25 million; first-half pretax income increased 8% to $37 million. Management cited higher volume and improved margin per loan. First-half capture rate was 80.4%, versus 76.6% a year earlier.
- Cash flow: First-half operating cash flow was $306 million, compared with $548 million. Inventory investment used $400 million of cash; the seasonal reduction in mortgage loans available-for-sale provided $117 million. Investing cash outflow was $193 million, including the American West acquisition; financing cash outflow was $587 million.
- Liquidity and debt at June 30: Cash and equivalents were $631 million, with $28 million restricted. Notes payable were $2,740 million and Financial Services debt was $234 million. The company had no revolver borrowings and $746 million available under its $1.0 billion revolving facility after letters of credit. Debt to total capitalization, excluding Financial Services debt, was 35.1%; the company reported compliance with its credit covenants.
- Balance sheet: Total assets were $10,096 million, shareholders’ equity $5,070 million, and house and land inventory $7,802 million. Cash, cash equivalents, and restricted cash declined to $659 million from $1,134 million at year-end 2018.
Material changes versus the prior comparable period
- Q2 revenue declined 3%, pretax income 22%, net income 26%, and diluted EPS from $1.12 to $0.86. First-half revenue declined 1%, pretax income 15%, and net income 18%.
- Comparisons were affected by prior-year California land-sale gains of $26.4 million and larger insurance-reserve reversals in 2018. Homebuilding pretax income fell 24% in Q2 and 17% for the first half.
- Home-sale gross margin declined 90 basis points in Q2 and 50 basis points for the first half. Management cited community mix, higher house and land costs, slightly higher amortized interest costs, and moderately higher sales discounts.
- SG&A rose 15% in Q2 and 10% for the first half; the year-over-year comparisons also reflect the larger insurance-reserve reversals recorded in 2018.
- Cash used in financing increased year over year, including $297 million of debt repayments, $119 million of share repurchases in cash-flow reporting, and $62 million of dividends paid. The company separately reported $108.5 million of repurchases under its authorization for the first half.
Outlook, risks, and unusual items
- Management maintained a positive view of the housing cycle and its market position, citing employment, wage growth, low unemployment, consumer confidence, and improved affordability. It stated it would remain disciplined and pursue long-term growth; the filing provides no quantified earnings or revenue guidance.
- In April, PulteGroup acquired American West’s Las Vegas homebuilding operations for $163.7 million, including approximately 1,200 finished lots and control of about 2,300 additional lots through options. The acquisition was described as not material to results or financial condition.
- The company retired $274 million of senior notes due 2021 in a tender offer, recording a $4.8 million loss. It had $426 million of those notes remaining, with no senior-note repayments scheduled before 2021.
- Land-related charges were $6.8 million for the first half. Land-option agreements carried $2.8 billion of remaining purchase price; deposits and pre-acquisition costs at risk totaled $255 million, of which $10 million was refundable.
- General-liability and other insurance reserves were $716 million at quarter-end, while related insurance receivables were $105 million. The company wrote off $24.2 million of insurance receivables in the first half. Management cautioned that construction-defect claims and reserve estimates are uncertain and may change materially.
- A Lehman Brothers claim against former subsidiary CTX Mortgage alleges indemnifiable losses of up to $261 million. The company said it believes it has meritorious defenses and has recorded its best estimate within a range of potential losses. Recorded liabilities for legacy mortgage claims overall declined to $25.5 million after funding settled claims.
- Other risks include changes in mortgage rates and financing availability, labor and construction costs, land availability, insurance coverage, economic and local-market conditions, and litigation or regulatory matters. The company noted that seasonal working-capital needs typically increase in the third and fourth quarters.
Important facts for investors to verify
- Whether the Q2 improvement in orders persists, and how mortgage rates, affordability, cancellations, closings, and backlog convert into revenue.
- Whether margins stabilize amid cost pressure, discounts, market-mix shifts, and the higher speculative-home inventory strategy.
- The adequacy and development of insurance reserves and receivables, including construction-defect claims and legacy mortgage litigation.
- Liquidity and funding needs as inventory investment, land-option commitments, and seasonal working capital evolve; also monitor the August 2019 maturity of the mortgage repurchase agreement.
- Capital allocation and debt reduction, including actual repurchases, dividends, remaining authorization, and the 2021 senior-note maturity.