01—Abstract
Summary
Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.
Pulte Homes, Inc. reported a sharp decline in 2006 as the U.S. housing market weakened.
Consolidated revenues were $14.27 billiona in 2006, compared with $14.69 billion in 2005, and net income fell to $687.5 million from $1.49 billion. Diluted earnings per share were $2.66, versus $5.68 in 2005. Homebuilding pre-tax income dropped to $1.01 billion from $2.30 billion, driven by weaker demand, higher cancellation rates, greater sales incentives and $409.5 million of land and deposit write-downs and write-offs.
Homebuilding settlements fell to 41,487 units from 45,630, and the homebuilding gross profit margin from home sales declined to 17.4% from 23.4%. The company remained financially sturdy despite the downturn. Shareholders' equity rose to $6.58 billionb, cash and equivalents totaled $551.3 million, and senior notes stood at $3.54 billion.
Its $2.01 billionc unsecured revolving credit facility had no borrowings outstanding at year-end. Operating cash flow was negative $267.5 million in 2006, and the company repurchased $122.3 million of stock during the year. Net new orders fell 29% to 33,925 units, and backlog declined to 10,255 units from 17,817.
Management stated that difficult market conditions would likely continue to affect the company for at least the near term. It is shortening its land pipeline, reducing production and slowing land purchases. The company also disclosed an ongoing EPA storm water discharge inquiry, for which it cannot currently estimate costs, and a $48.7 milliond judgment received in 2005 in the First Heights matter.
02—Key points
Key Highlights
- Consolidated revenues were $14.27 billion in 2006, down from $14.69 billion in 2005, and net income fell to $687.5 million from $1.49 billion.
- Diluted EPS was $2.66 in 2006, compared with $5.68 in 2005.
- Homebuilding pre-tax income fell to $1.01 billion from $2.30 billion, with $505 million of valuation adjustments and write-offs cited as a negative impact.
- Homebuilding gross profit margin from home sales was 17.4%, down from 23.4% in 2005. Cancellation rates rose to 29.4% for the year from 17.3%.
- Net new orders decreased 29% to 33,925 units, and ending backlog fell to 10,255 units from 17,817.
- Shareholders' equity increased to $6.58 billion, and the company had $1.45 billion available under its revolving credit facility at year-end.
- Operating cash flow was negative $267.5 million in 2006, and the company repurchased $122.3 million of common stock.
03—Questions
Frequently Asked Questions
Why did Pulte's profitability decline so sharply in 2006?
The filing attributes the decline to weakened demand from lower consumer confidence, decreased housing affordability and large supplies of resale and new home inventories. These conditions led to slower sales, higher cancellations and greater use of price discounts and incentives. The company also recorded $203.8 million of land and community valuation adjustments, $151.2 million of deposit and pre-acquisition cost write-offs, and $54.6 million of land held for sale adjustments.
How is Pulte's balance sheet positioned to handle the downturn?
At December 31, 2006, the company reported cash and equivalents of $551.3 million, senior notes of $3.54 billion and shareholders' equity of $6.58 billion. Its $2.01 billion unsecured revolving credit facility had no borrowings outstanding, with $1.45 billion available. The debt-to-total capitalization ratio was approximately 35%, or 31.2% net of cash.
What does management expect for the near term?
Management expects difficult market conditions to continue to affect the company for at least the near term. It is slowing land purchases, shortening its land pipeline, reducing the number of controlled lots and cutting spec home production, while still buying select land positions. The filing says it cannot predict the duration or severity of the current market conditions.
Are there significant legal or regulatory risks disclosed?
The company disclosed an EPA request for information under the Clean Water Act regarding storm water discharge practices, which has been referred to the Department of Justice. The company is in pre-filing negotiations and believes it has defenses, but says it cannot predict the outcome or estimate the costs. Separately, it said that construction defect and other claims are not expected to have a material adverse impact on its results.
What drove the change in homebuilding unit volume and pricing?
Unit settlements fell 9% to 41,487 homes, while the average selling price rose 7% to $337,000. Net new orders fell 29%, and the filing attributes the weakness to closeouts of several large communities, rising home prices, higher interest rates and increased resale inventories.
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