PulteGroup, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018, with fourth-quarter results also summarized. PulteGroup is a U.S. homebuilder operating in 44 markets across 24 states; homebuilding generated 98% of consolidated revenue. Its financial services business principally provides mortgage, title, and insurance services.
Financial and operating results
| Metric | FY 2018 | FY 2017 | Change or context |
|---|---|---|---|
| Consolidated revenue | $10.188 billion | $8.578 billion | Up 19% |
| Income before income taxes | $1.348 billion | $938.8 million | Up 44% |
| Net income | $1.022 billion | $447.2 million | 2017 included a $172.1 million Tax Act-related charge |
| Diluted earnings per share | $3.55 | $1.44 | Basic EPS was $3.56 |
| Homebuilding income before taxes | $1.289 billion | $865.3 million | Up 49% |
| Home-sale gross margin | 23.2% | 22.4% | Improved 80 basis points |
| Operating cash flow | $1.450 billion | $663.1 million | Driven primarily by earnings and lower mortgage loans held for sale |
| Cash, cash equivalents and restricted cash | $1.134 billion | $306.2 million | Includes $23.6 million restricted cash |
| Notes payable | $3.028 billion | $3.007 billion | Includes $348.4 million of Financial Services debt |
- Home-sale revenue rose 18% to $9.818 billion, reflecting 10% more closings (23,107) and an 8% increase in average selling price to $425,000.
- Net new orders increased 1% to 22,833 units; the cancellation rate was 14%. Year-end backlog fell 3% to 8,722 homes, valued at $3.836 billion.
- Financial Services revenue increased 7% to $205.4 million, but pretax income decreased 20% to $58.7 million. Lower capture rates and competitive mortgage pricing, plus a $16.1 million increase in loan-origination liabilities, pressured results. Capture rate declined to 76.2% from 79.9%.
- For Q4 2018, consolidated revenue was $2.999 billion, pretax income $329.5 million, net income $237.6 million, and diluted EPS $0.84. Quarterly results included $66.9 million of land impairments and $9.0 million of land-held-for-sale valuation adjustments in cost of revenues, as well as a $16.2 million Financial Services loan-liability charge.
Liquidity, debt and capital allocation
- At year-end, the company reported $760.6 million available under its $1.0 billion revolving credit facility, net of letters of credit; it had no revolver borrowings and was in covenant compliance. The facility matures in June 2023.
- Debt-to-total capitalization, excluding Financial Services debt, was 38.6%, within management’s stated 30%–40% target range. The filing reports $3.0 billion of senior notes outstanding, with no scheduled repayment until March 2021, when $700 million is due.
- Operating cash flow was $1.450 billion; investing activities used $41.9 million and financing activities used $580.3 million. The company repurchased 10.9 million shares for $294.6 million and paid $104.0 million in dividends during 2018. Remaining repurchase authorization was $299.9 million.
Changes, outlook and risks
- Management reported an industry-wide demand slowdown beginning in Q2 2018, associated with higher mortgage rates and persistent affordability challenges. Traffic increased, but conversion to orders was weaker, particularly among first-time and move-up buyers.
- Management cited supportive employment and consumer-confidence trends and limited new- and existing-home supply, but provided no specific numerical revenue, earnings, or margin guidance. The company said its land positions and communities could support stronger demand if it accelerates.
- Land-related charges declined to $99.4 million from $191.9 million in 2017. The 2018 total included a $59.2 million impairment tied to an unfavorable entitlement decision, as well as other impairments, land-sale valuation adjustments, and option-cost write-offs. Two California land sales generated $26.4 million in gains.
- Key exposures include housing-cycle weakness, interest rates and mortgage availability, affordability, land values, construction labor and material costs, and regulatory or permitting delays. Hurricanes disrupted some markets in 2017 and 2018 but did not materially affect reported results.
- Construction-defect and other self-insurance reserves totaled $737.0 million; management estimated a reasonably possible loss range of $625 million to $850 million. Mortgage loan-origination liabilities were $50.3 million. A Lehman-related claim against former Centex mortgage subsidiary CTX Mortgage alleges indemnifiable losses of up to $261 million; the company says it is defending the claim and has recorded its best estimate of potential losses.
- Other unusual items include the 2017 Tax Act-related deferred-tax charge, favorable insurance reserve adjustments of $35.9 million in 2018, and adoption of ASC 606, which increased opening 2018 retained earnings by $22.4 million net of tax. The company expected adoption of the lease standard in 2019 to add approximately $80 million of lease assets and liabilities, without a material income-statement or cash-flow impact.
Most important facts for investors to verify
- Whether order trends, cancellations and backlog stabilize after the 2018 demand slowdown, particularly in Northern California and among first-time and move-up buyers.
- Whether home-sale margins can hold up amid affordability pressures, higher construction costs, and continued land impairments.
- The assumptions and eventual cash outcomes for construction-defect reserves, insurance recoveries, and mortgage representation-and-warranty claims, including the Lehman matter.
- Whether Financial Services capture rates and margins recover, and whether the $50.3 million loan-origination liability proves adequate.
- Liquidity and capital-return capacity relative to debt maturities, land commitments, repurchases, and dividends.