PulteGroup, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. PulteGroup is a U.S. homebuilder with mortgage banking and title operations. Comparisons below are with Q1 2012 unless noted. Financial statement amounts are in millions of dollars unless specified.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $1,162.8 | $881.0 |
| Homebuilding revenue | $1,125.9 | $852.2 |
| Financial Services revenue | $36.9 | $28.9 |
| Income (loss) before taxes | $82.4 | $(13.5) |
| Net income (loss) | $81.8 | $(11.7) |
| Diluted earnings (loss) per share | $0.21 | $(0.03) |
| Cash from operating activities | $270.6 | $114.7 |
- Home sale revenue increased 35% to $1,099.8 million, reflecting 23% more closings (3,833) and a 10% higher average selling price ($287,000).
- GAAP home sale gross margin improved to 18.0% from 12.5%. Adjusted home sale gross margin, a non-GAAP measure, was 22.9% versus 18.7%.
- SG&A was $129.6 million, up 5%; as a percentage of home sale revenue it fell to 11.8% from 15.2%.
- Financial Services pretax income rose to $14.3 million from $6.9 million, principally on higher origination volume and improved expense leverage.
Balance sheet, debt and liquidity
- At March 31, cash and equivalents were $1,592.9 million, restricted cash was $66.6 million, and inventory was $4,112.8 million, down from $4,214.0 million at year-end 2012.
- Senior notes had a carrying value of $2,511.7 million; Financial Services debt was $56.6 million. The company reported a 52.5% debt-to-total-capitalization ratio excluding Financial Services borrowings and 27.2% net of cash and equivalents, including restricted cash.
- Operating cash flow was $270.6 million, supported by net income and decreases in inventory and mortgage loans held for sale. Investing activities used $1.2 million; financing activities used $81.3 million, mainly from repayment of $82.2 million under the mortgage repurchase facility.
- Management said current operations and borrowing resources were sufficient for current and foreseeable capital requirements, while noting leverage remained above desired targets.
Changes versus the prior period and operating trends
- The company reported its fourth consecutive quarter of pretax income. Consolidated revenue increased 32%, and homebuilding pretax results improved to $68.0 million from a $20.4 million loss.
- Net new orders increased 4% to 5,200 despite 14% fewer active communities. Backlog rose 35% to 7,825 homes and 52% in value to $2,413.8 million. The cancellation rate declined to 13% from 15%.
- Unsold homes in production were 48% below the year-earlier level. Total inventory declined during the quarter, as the company emphasized inventory turns and controlled spec-home levels.
- Homebuilding pretax income improved across all six reported segments; Northeast home sale revenue declined 5%, while Southwest orders declined 11%, with management citing fewer communities and deliberate sales-pace moderation in some markets.
Outlook, risks and unusual items
- Management expressed increased confidence in a broad, sustainable U.S. housing recovery, citing stronger demand, low mortgage rates, improved pricing and backlog. It did not provide numerical earnings or revenue guidance.
- Management plans to focus on margins, efficient use of land, capital allocation and controlling spec inventory. It also expects to increase investment in strategic land positions that meet underwriting requirements. Rising material and labor costs could pressure margins.
- On April 24, 2013, after quarter-end, the company announced it would redeem the remaining $398.9 million principal amount of 2014 senior notes using cash. It expected an approximately $18 million debt-retirement loss in Q2 2013.
- Mortgage-loan representation-and-warranty liabilities were $162.5 million at quarter-end; the company said future losses could exceed estimates. It generally expects repurchase requests to continue through 2014 and can cure or refute over 60% of requests received.
- Recorded reserves for insurance and other claims totaled $717.0 million, largely for general liability claims; warranty liabilities were $63.2 million. Actual costs may differ materially from estimates.
- The company fully reserved net deferred tax assets of $2.4 billion. Management said continued profitability and improving business trends could support reducing a large portion of the valuation allowance in the second half of 2013, but this was conditional and not assured.
- Other exposures include $172.7 million of outstanding letters of credit, approximately $1.0 billion of surety bonds, and $962.4 million of remaining purchase prices under land options. Management did not expect a material amount of letters of credit or surety bonds to be called.
Important facts for investors to verify
- Whether demand, pricing, closings and backlog growth persist, particularly in segments with falling orders or fewer active communities.
- Whether improved gross margins can withstand rising labor and material costs, and whether inventory and spec-home reductions continue.
- Completion and actual cost of the announced 2014-note redemption, including the expected Q2 debt-retirement charge and resulting leverage.
- Developments in mortgage repurchase claims, construction-defect and insurance reserves, and related legal or regulatory matters.
- Whether profitability supports any deferred-tax valuation-allowance release; the filing makes clear that realization remains uncertain.