PulteGroup, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet figures are as of March 31, 2014, compared with December 31, 2013. PulteGroup is a U.S. homebuilder with mortgage and title operations. Interim results are unaudited and may not indicate full-year results.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $1.119 billion | $1.163 billion, down about 4% |
| Income before income taxes | $130.0 million | $82.4 million, up 58% |
| Net income / diluted EPS | $74.8 million / $0.19 | $81.8 million / $0.21 |
| Home sale gross margin | 23.8% | 18.0%, up 580 basis points |
| Operating cash flow | $91.4 million | $270.6 million |
| Cash and equivalents | $1.268 billion | $1.580 billion at December 31, 2013 |
| Senior notes | $1.814 billion | $2.058 billion at December 31, 2013 |
| Financial Services debt | $35.8 million | $105.7 million at December 31, 2013 |
| Total assets / shareholders’ equity | $8.351 billion / $4.664 billion | $8.734 billion / $4.649 billion at December 31, 2013 |
Home sale revenue was $1.088 billion, down 1%; closings fell 10% to 3,436, while average selling price rose 10% to $317,000. Net new orders declined 6% to 4,863 homes; backlog was 7,199 homes, down 8% in units but flat in dollars at $2.422 billion. The cancellation rate improved to 12% from 13%. SG&A rose 12% to $144.9 million and increased to 13.3% of home sale revenue from 11.8%.
Cash from operations was positive, but lower year over year, reflecting increased inventory investment and working-capital movements. Financing cash outflow was $383.7 million, including early debt retirement, share repurchases, dividends, and Financial Services debt repayments. The company reported a 28.0% debt-to-total-capitalization ratio, excluding Financial Services borrowings.
Material changes and notable items
- Homebuilding pretax income increased to $108.4 million from $68.0 million, primarily on improved home sale margins; lower revenue and an $8.6 million debt-retirement loss partly offset the improvement.
- Financial Services pretax income rose to $21.6 million from $14.3 million despite revenue falling 32% to $24.9 million. Results benefited from an $18.6 million reduction in mortgage loan-origination liability reserves; mortgage origination volume and capture rate declined.
- Net income declined despite higher pretax income. Income tax expense was $55.2 million versus $0.6 million a year earlier; the 2014 provision reflected a more normalized rate, while the prior-year provision primarily reflected changes in unrecognized tax benefits. Deferred tax expense in Q1 2014 was $52.1 million.
- The company retired $245.7 million of senior notes before maturity, recording an $8.6 million loss. It repurchased 2.2 million shares for $44.6 million and declared a $0.05 per-share dividend, paid in April. Remaining repurchase authorization was $189.7 million.
Outlook, risks and contingencies
Management described the U.S. housing recovery as continuing and said low rates, affordability, and limited housing supply supported demand. It expects near-term order growth to be moderated by fewer active communities and its disciplined land strategy; no specific earnings or revenue guidance was provided. Management plans to emphasize margins, capital allocation, land investment meeting its underwriting standards, and control of unsold speculative homes. It cautioned that higher mortgage rates could moderate demand and pricing, while labor and material cost increases could pressure margins.
Key exposures include mortgage financing availability and rates, local housing-market conditions, land and construction costs, labor availability, competition, regulation, and legal or insurance claims. Mortgage repurchase liabilities were $103.0 million after the quarter’s reserve reduction; management noted actual claims could differ from estimates. Self-insured and general-liability reserves were $664.4 million, warranty liabilities were $61.6 million, and outstanding surety bonds were $960.7 million. The company also disclosed $1.6 billion of remaining purchase prices under land-option agreements, $161.8 million of letters of credit, tax examinations and $173.3 million of gross unrecognized tax benefits. Management did not expect disclosed litigation or the RMBS indemnity matters to have a material adverse effect, but outcomes remain uncertain.
Liquidity included $1.268 billion of unrestricted cash and $75.6 million of restricted cash. The unsecured $150 million letter-of-credit facility and the reduced $99.8 million Pulte Mortgage repurchase facility were both due to expire in September 2014; management said it believed liquidity would be adequate, while noting renewal or replacement terms were not assured.
Most important facts for investors to verify
- Whether improved home sale margins can be sustained as mortgage rates, labor and material costs, and local demand change.
- Whether order and backlog trends recover, particularly given fewer active communities and weaker results in parts of the Southwest.
- How much Financial Services earnings depended on the $18.6 million reserve release, and how mortgage competition and lower capture affect future results.
- The cash and earnings impact of debt maturities, facility renewals, land commitments, mortgage repurchase claims, tax matters, and self-insurance reserves.
- How deferred tax asset realizability and tax-rate changes affect future reported earnings and cash taxes.