01—Abstract
Summary
Summary of the 10-K filed January 31, 2019. Cited figures are marked; the original filing is the authoritative source.
PulteGroup, Inc. (NYSE: PHM), one of the largest U.S. homebuilders, reported record-level results for 2018, with net income of $1.02 billiona ($3.55 diluted EPS), up from $447.2 million in 2017, on consolidated revenues of $10.19 billion.
Homebuilding closed 23,107 homes at an average selling price of $425,000,b and home sale gross margin was 23.2%, compared with 22.4% in 2017. Income before income taxes for Homebuilding rose to $1.29 billion, though the filing notes that industry demand softened beginning in the second quarter of 2018, with higher mortgage rates since May 2018 and lower conversion of traffic to signups, especially among first-time and move-up buyers. Net new orders rose 1% in units to 22,833, and backlog ended the year at 8,722 units ($3.8 billion), down from 8,996 units a year earlier.
The balance sheet strengthened over the year. Cash, cash equivalents and restricted cash rose to $1.13 billionc from $306.2 million, and shareholders' equity increased to $4.82 billion. Notes payable were $3.03 billion, and the debt-to-total-capitalization ratio, excluding Financial Services debt, was 38.6% against a targeted range of 30.0% to 40.0%.
The company repurchased 10.9 million shares for $294.6 milliond in 2018 and had $299.9 million remaining under its repurchase authorization. Net cash provided by operating activities was $1.45 billion, and the company controlled 149,577 lots, of which 89,530 were owned. Risks highlighted in the filing include land-related charges of $99.4 million in 2018 (versus $191.9 million in 2017), exposure to construction-defect and mortgage repurchase claims, a $261 million indemnification claim by Lehman Brothers against CTX Mortgage Company (for which the company has recorded a liability), and the effects of the Tax Act on mortgage interest deductibility and the company's effective tax rate of 24.2%.
02—Key points
Key Highlights
- Net income of $1.02 billion, or $3.55 per diluted share, in 2018, compared with $447.2 million, or $1.44 per diluted share, in 2017.
- Consolidated revenues of $10.19 billion; home sale revenues of $9.82 billion on 23,107 closings at an average selling price of $425,000.
- Home sale gross margin of 23.2% in 2018, up from 22.4% in 2017, while land-related charges fell to $99.4 million from $191.9 million.
- Demand softened from the second quarter of 2018, with year-end backlog of 8,722 units ($3.8 billion) versus 8,996 units a year earlier and a cancellation rate of 14%.
- Cash, cash equivalents and restricted cash of $1.13 billion at year-end, with $760.6 million available under the revolving credit facility and no borrowings outstanding.
- Repurchased 10.9 million shares for $294.6 million in 2018; $299.9 million remained under the authorization at year-end.
- Pending legal exposure includes a Lehman Brothers claim of up to $261 million against CTX Mortgage Company, for which a liability has been recorded at management's best estimate.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed January 31, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $10.19B$8.57B | +18.8% |
| SG&A Expenses | $1.01B$891.58M | +13.5% |
| Interest Expense | $618K$503K | +22.9% |
| Net Income | $1.02B$447.22M | +128.5% |
| EPS (Basic) | $3.56$1.45 | +145.5% |
| EPS (Diluted) | $3.55$1.44 | +146.5% |
| Shares Outstanding (Basic) | 283.58M305.09M | −7.1% |
| Shares Outstanding (Diluted) | 284.87M306.81M | −7.2% |
05—Questions
Frequently Asked Questions
How did PulteGroup's profitability change in 2018?
Net income rose to $1.02 billion, or $3.55 per diluted share, from $447.2 million, or $1.44 per diluted share, in 2017. Homebuilding income before income taxes increased to $1.29 billion from $865.3 million, driven by higher home sale revenues, a higher gross margin, and lower land-related charges. The 2017 results included a $172.1 million charge tied to remeasuring deferred tax balances under the Tax Act.
What did the filing say about demand trends going into 2019?
The company said demand softened across all major buyer groups and geographies starting in the second quarter of 2018, closely correlated with mortgage rate increases beginning in May 2018, and it cited affordability challenges. Net new orders rose only 1% in units for the year, and backlog declined 3% in units. The filing also noted that fundamentals such as employment, consumer confidence and limited supply remained favorable.
How is PulteGroup's balance sheet and liquidity positioned?
At December 31, 2018, the company had $1.13 billion of cash, cash equivalents and restricted cash, $760.6 million of available borrowing capacity under its $1.0 billion revolving credit facility, and $3.0 billion of unsecured senior notes with the next scheduled maturity in March 2021. The debt-to-total-capitalization ratio, excluding Financial Services debt, was 38.6%, within its targeted 30.0% to 40.0% range.
What are the main legal and financial risks disclosed?
The company disclosed mortgage repurchase and indemnification claims, including a Lehman Brothers adversary proceeding against CTX Mortgage Company seeking indemnifiable losses of up to $261 million, for which a liability has been recorded. It also cited construction-defect and warranty claims, with recorded self-insurance reserves of $737.0 million, and ongoing tax audits with $30.6 million of gross unrecognized tax benefits.
How did the Tax Act affect PulteGroup?
The Tax Act lowered the federal corporate tax rate from 35% to 21% effective in 2018, and the company's effective tax rate was 24.2% in 2018 versus 52.4% in 2017. The company also noted that the Tax Act limits the mortgage interest deduction to the first $750,000 of new mortgages and caps the state and local tax deduction at $10,000, which could reduce homeownership affordability and demand.
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