PulteGroup, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. PulteGroup is a U.S. homebuilder operating across 60 markets in 29 states, with mortgage banking and title operations.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $1.069 billion | $927.2 million | $1.950 billion | $1.732 billion |
| Income (loss) before tax | $39.9 million | $(53.3) million | $26.4 million | $(98.7) million |
| Net income (loss) | $42.4 million | $(55.4) million | $30.8 million | $(94.9) million |
| Diluted EPS | $0.11 | $(0.15) | $0.08 | $(0.25) |
| Home-sale gross margin | 15.1% | 12.2% | 14.0% | 12.3% |
- Q2 home-sale revenue rose 14%, supported by an 8% increase in average selling price and 5% more closings. Six-month home-sale revenue increased 9%.
- Adjusted home-sale gross margin, a non-GAAP measure excluding land/community valuation adjustments and capitalized interest amortization, was 20.3% in Q2 and 19.6% for the first half, versus 17.1% and 17.0% in 2011.
- Q2 Financial Services pretax income was $16.0 million, compared with a $16.6 million loss; first-half income was $22.8 million versus a $15.7 million loss. Higher originations, revenue per loan and expense leverage helped; the prior-year periods included $19.3 million of loan-repurchase provision.
- Net new orders rose 32% in Q2 and 23% for the first half. At June 30, backlog was 7,560 homes valued at $2.167 billion, up 31% in units and 37% in dollars year over year; cancellation rates were 14% versus 19% in Q2 2011.
Cash flow, balance sheet and liquidity
- Cash and equivalents were $1.310 billion at June 30, up from $1.083 billion at year-end; restricted cash was $86.8 million.
- Senior notes had a carrying value of $3.094 billion. Debt to total capitalization was 61.0%, or 46.2% net of cash and equivalents including restricted cash; management said leverage remained above its desired targets.
- Six-month operating cash flow was positive $211.5 million, versus negative $219.3 million in 2011. The 2012 result reflected net income, a $72.2 million inventory reduction and a $28.8 million increase in accounts payable, accrued and other liabilities. Investing cash flow was positive $16.4 million and financing cash flow was negative $0.5 million.
- House and land inventory was $4.552 billion, down from $4.636 billion at year-end. Shareholders’ equity was $1.975 billion.
- Senior-note maturities include $96.5 million in August 2012, $62.7 million in February 2013, and $117.8 million in October 2013. The company reported $1.3 billion of unrestricted cash and said current operations and borrowing resources were sufficient for foreseeable capital needs.
Changes, outlook and risks
- All six homebuilding regions increased Q2 net orders. Revenues and margins improved, while SG&A fell 10% in Q2 and 12% for the first half year over year. Unsold homes in production were 45% lower than at December 31, 2011.
- Management described demand as having found its footing and expressed optimism for the rest of 2012. It said it was positioning for a gradual recovery but acknowledged that the timing of a broad, sustainable recovery remained uncertain. Management expected 2012 profitability to be weighted toward the second half because of seasonality; this was not quantified earnings guidance.
- Key execution priorities include strategic pricing, reducing construction costs and overhead, improving inventory turns, limiting spec-home reliance and allocating capital according to risk.
- Risks include housing-market weakness, mortgage-rate and financing changes, land and construction costs, inflation, labor availability, regulation, and legal or insurance claims. The company warned that higher costs may not be recoverable through selling prices.
- Mortgage-loan representation-and-warranty liabilities were $120.7 million. Management said claims remained elevated and future losses could exceed estimates. A separate indemnity exposure relates to Centex-originated loans in two RMBS lawsuits involving $162 million of loans; potential liability could not be quantified, though the company did not expect a material adverse impact.
- Self-insurance reserves for claims, predominantly general liability, were $733.0 million and are subject to significant estimation uncertainty. Surety bonds outstanding were approximately $1.1 billion; letters of credit were $200.5 million. The company said it did not expect a material amount of these instruments to be called.
- The company fully reserved its $2.5 billion net deferred tax assets because realization depends on future taxable income. It reported $175.7 million of gross unrecognized tax benefits and $38.1 million of accrued interest and penalties; examinations and potential settlements remain unresolved.
- Land-option agreements represented $726.5 million of remaining purchase price, generally cancellable at the company’s discretion; deposits and pre-acquisition costs were $55.9 million, of which only $1.2 million was refundable.
Important facts for investors to verify
- Whether order and backlog growth converts into closings, sustained pricing and improved gross margins.
- Near-term debt maturities, refinancing or repayment plans, and progress toward reducing leverage.
- Developments in mortgage repurchase claims, Centex-related indemnities, and the adequacy of the $120.7 million liability.
- Changes in the $733.0 million self-insurance reserve and any significant legal, warranty or surety-bond costs.
- Evidence supporting management’s second-half-weighted profitability outlook, given the uncertain housing recovery and seasonal results.