PulteGroup, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. PulteGroup is a U.S. homebuilder operating across 61 markets in 29 states, with Pulte Homes, Del Webb and Centex brands, plus mortgage and title operations.
Financial and operating performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Consolidated revenue | $4.137 billion | $4.569 billion |
| Net loss | $210.4 million | $1.097 billion |
| Diluted loss per share | $0.55 | $2.90 |
| Operating cash flow | $17.2 million | $590.9 million |
| Home closings | 15,275 | 17,095 |
| Average selling price | $259,000 | $259,000 |
| Year-end backlog | 3,924 homes; $1.060 billion | 3,984 homes; $1.057 billion |
Home sale revenue fell 11% to $3.951 billion as closings declined 11%; flat average prices partly offset the volume decline. GAAP home-sale gross margin improved to 12.8% from 9.4%; management’s adjusted measure, excluding specified items, rose to 17.9% from 16.7%. SG&A was $519.6 million, or 13.2% of home-sale revenue, versus $895.1 million, or 20.3%, in 2010; the prior-year figure included $280.4 million of insurance reserve adjustments.
Fourth-quarter consolidated revenue was $1.262 billion, pretax loss was $9.1 million, and net income was $13.8 million, or $0.04 per diluted share. The quarter included a $22.9 million income tax benefit; Homebuilding recorded $18.4 million pretax income while Financial Services recorded a $27.4 million pretax loss.
Balance sheet, debt and liquidity
- At year-end, cash and equivalents were $1.083 billion and restricted cash was $101.9 million. Cash declined $400.3 million during 2011.
- Senior notes had a $3.088 billion carrying value, down from $3.392 billion. The company retired $323.9 million of debt during 2011 and reported $3.2 billion of debt retirements over three years. Debt-to-total capitalization was 61.4%, or 49.5% net of cash and restricted cash.
- House and land inventory was $4.636 billion, down from $4.782 billion. Total assets were $6.886 billion and shareholders’ equity was $1.939 billion.
- Operating cash flow was only $17.2 million, compared with $590.9 million in 2010; the prior-year amount included $941.3 million of net income-tax refunds. 2011 operating cash flow included $62.2 million in net tax refunds and was reduced by $52.8 million used to fund Pulte Mortgage.
- The company terminated its $250 million revolving credit facility in March 2011. It had a $200 million unsecured letter-of-credit facility, with $152.7 million outstanding, and $83.2 million of letters of credit outstanding under cash-collateralized agreements.
Changes, outlook and material risks
- Results improved substantially from 2010, but the company remained loss-making for the year. Lower impairment charges, improved home-sale margins and lower overhead drove much of the improvement; home closings and revenue declined.
- Land-related charges fell to $35.8 million from $216.4 million. A $240.5 million goodwill impairment was recorded in 2011, leaving no goodwill on the year-end balance sheet. Total specified significant charges across categories were approximately $303.4 million.
- Net new orders were essentially flat at 15,215 units; cancellation rate remained 19%. Backlog units were down 2% year over year. Management said substantially all year-end backlog was scheduled to close in 2012, but contracts may be cancelled or renegotiated.
- Management characterized its 2012 outlook as cautious, expected challenging conditions to persist in the near term, and said visibility into future earnings was limited. It provided no quantified earnings or revenue guidance. Its priorities include pricing and product alignment, cost reduction, efficient overhead, improved inventory turns and reducing speculative home sales.
- Risks include weak housing demand, unemployment and consumer confidence, mortgage availability and underwriting standards, home prices and land values, further inventory impairments, construction costs, regulation, and legal and warranty claims.
- Mortgage-loan representation-and-warranty liabilities were $128.3 million at year-end; 2011 provisions were $59.3 million. Management warned actual future losses could exceed estimates. The filing also describes indemnity exposure related to Centex-originated loans in certain mortgage-backed securities transactions.
- Self-insurance reserves were $741.4 million, mainly for general liability and construction-defect claims; management estimated a reasonably possible loss range of $650 million to $850 million and cautioned ultimate costs could fall outside it. Legal and governmental proceedings were not expected by management to have a material adverse impact, but additional charges could be significant if losses exceed reserves.
- Deferred tax assets of approximately $2.5 billion were fully offset by a valuation allowance. Use of certain Centex tax attributes is limited by an approximately $67.4 million annual Section 382 limitation.
Most important facts for investors to verify
- Whether the lower impairment burden and improved margins can persist while closings, revenue and operating cash flow remain weak.
- The cash requirements and potential range of losses for mortgage repurchase claims, self-insurance, construction defects and related litigation.
- Debt maturities and refinancing capacity, especially the scheduled $574.6 million principal maturity in 2014 and the company’s elevated debt-to-capital ratio.
- Whether backlog converts to closings as expected, given cancellation rights and the uncertain housing and mortgage environment.
- The recoverability and future usability of tax attributes, given the full valuation allowance and Section 382 limits.