01—Abstract
Summary
Summary of the 10-K filed February 4, 2015. Cited figures are marked; the original filing is the authoritative source.
PulteGroup, Inc. (NYSE: PHM), one of the largest U.S. homebuilders, reported a year of improved profitability in 2014.
Home sale revenues rose 4% to $5.66 billiona on closings that declined 3% to 17,196 units, as the average selling price increased 8% to $329,000. Homebuilding pretax income rose 33% to $635.2 million, and gross margin from home sales improved 280 basis points to 23.3%. Including Financial Services, consolidated pretax income was $689.8 million and net income was $474.3 million, or $1.26 per diluted share, compared with $2.62 billion in 2013, which was inflated by a $2.1 billion deferred tax valuation allowance reversal.
The company reduced senior notes by $245.7 million, raised its quarterly dividend to $0.08b per share, repurchased $245.8 million of shares, and increased its share repurchase authorization by $750.0 million, leaving $738.5 million available at year-end. Cash and equivalents were $1.3 billion and the debt-to-total-capitalization ratio, excluding Financial Services debt, was 27.5%. Operating cash flow fell to $309.2 million from $881.1 million in 2013, mainly because inventories increased $346.6 million as land investment spending rose almost 40%.
Risks noted in the filing include a $69.3 millionc increase in general liability insurance reserves tied to siding repairs in previously completed communities, total self-insurance reserves of $710.2 million, and exposure to mortgage loan repurchase claims. Financial Services income was helped by a $18.6 million reduction in loan origination liabilities, while its revenues fell 11%, reflecting heightened mortgage industry competition. Net new orders decreased 3% to 16,652 units, and the backlog ended the year at $1.9 billion (5,850 units).
02—Key points
Key Highlights
- Home sale revenues of $5.66 billion, up 4%, with average selling price up 8% to $329,000 and closings down 3% to 17,196 units
- Homebuilding gross margin from home sales of 23.3%, up 280 basis points, described as among the highest annual margins in company history
- Homebuilding pretax income of $635.2 million, up 33%; consolidated net income of $474.3 million ($1.26 diluted EPS) versus $2.62 billion in 2013, which included a $2.1 billion tax valuation allowance reversal
- Senior notes reduced by $245.7 million; dividend raised to $0.08 quarterly; $245.8 million of shares repurchased in 2014, with $738.5 million authorization remaining
- Operating cash flow fell to $309.2 million from $881.1 million as inventories rose $346.6 million on land investment spending up almost 40%
- Increased general liability insurance reserves by $69.3 million, primarily for siding repairs in previously completed communities; total self-insurance reserves $710.2 million
- Financial Services revenues fell 11% to $125.6 million amid mortgage industry competition, though pretax income rose 12% on lower loss reserves
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 4, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $5.82B$5.68B | +2.5% |
| SG&A Expenses | $861.39M$568.50M | +51.5% |
| Interest Expense | $849K$712K | +19.2% |
| Net Income | $474.34M$2.62B | −81.9% |
| EPS (Basic) | $1.27$6.79 | −81.3% |
| EPS (Diluted) | $1.26$6.72 | −81.2% |
| Shares Outstanding (Basic) | 370.38M383.08M | −3.3% |
| Shares Outstanding (Diluted) | 374.10M386.87M | −3.3% |
05—Questions
Frequently Asked Questions
How profitable was PulteGroup in 2014 compared with 2013?
Consolidated income before income taxes was $689.8 million in 2014 versus $527.8 million in 2013, and net income was $474.3 million versus $2.62 billion. The 2013 net income was inflated by a $2.1 billion income tax benefit from reversing a deferred tax asset valuation allowance; 2014 included a $215.4 million tax expense, reflecting a $45.6 million valuation allowance reversal.
What drove the improvement in home sale gross margins?
The filing attributes the 23.3% gross margin, up from 20.5% in 2013, to an improved pricing environment, strategic pricing and house cost reduction initiatives, and lower amortized interest costs (3.4% in 2014 versus 4.7% in 2013), which followed a significant reduction in outstanding debt. Land impairments were also lower at $3.9 million versus $13.4 million in 2012.
Why did operating cash flow decline in 2014?
Net cash provided by operating activities was $309.2 million in 2014 compared with $881.1 million in 2013. The filing cites a net increase in inventories of $346.6 million, driven by an almost 40% increase in investment spending to support future operations, partly offset by income before taxes of $689.8 million.
What is the company's outlook and capital allocation plan?
Management said it is optimistic heading into 2015 and expects to keep investing increasing amounts in its land portfolio, with investing in the business as the first capital allocation priority, followed by routine dividends and share repurchases. The filing also notes that the 2014 dividend was raised and that $738.5 million remained under the repurchase authorization at December 31, 2014.
What are the main risks related to mortgage operations and insurance?
The filing discloses potential losses on mortgage loans sold to investors due to representation and warranty breaches, mainly on 2006 and 2007 originations, and a guaranty for one investor of Centex-originated loans. Loan origination liabilities stood at $58.2 million at year-end after an $18.6 million reduction in 2014. General liability reserves total $710.2 million, with a range of reasonably possible losses of $650 million to $825 million.
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