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PHM > SEC Filings for PHM > Form 10-K on 5-Feb-2014All Recent SEC Filings

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Form 10-K for PULTEGROUP INC/MI/


5-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The underlying trends in U.S. housing point toward an ongoing multi-year recovery supported by favorable demographics, an improving economy, mortgage interest rates near historic lows, and limited supplies of new and existing home inventories. Our results in 2013 showed significant improvement in the majority of our key operating metrics in the first half of the year, while demand conditions slowed for us in the second half of the year as consumers adjusted to higher home prices and a moderate rise in mortgage interest rates. For the full year 2013, the overall improvement in market conditions, in concert with our own tactical actions, contributed to our seventh consecutive profitable quarter. Home closings, revenues, average selling price, inventory turns, gross margin, overhead leverage, and income before income taxes all improved in 2013 compared with 2012.

Our net new orders declined 10% in 2013 compared with 2012. A lower number of active communities contributed to the decline in net new orders as we maintained 14% fewer active communities in 2013 compared with 2012. The lower active community count resulted from the close-out of a number of long-term projects and is consistent with our more disciplined land investment strategy. In addition, demand slowed in the second half of 2013 in response to higher home prices and a rise in mortgage interest rates. We will continue to calibrate sales pace in each community to improve our gross margins and maximize returns on invested capital. We expect that this approach will continue to result in a moderation in our net new order volume in the short-term relative to overall growth in the U.S. homebuilding industry and relative to certain of our competitors. While we believe higher mortgage interest rates are inevitable and may have a moderating effect on demand and pricing, we believe this impact will be outweighed in the long-term by other factors driving increased sales volume as overall new home sales in the U.S. remain low compared with historical levels.

The significant improvements reported for 2013 also allowed us to continue to enhance our financial position. We generated significant positive cash flow from operations in each of the last two years via a combination of improved profitability and inventory management. Our improved financial position provided additional flexibility to retire debt early and increase our planned future investments in new communities, while also paying a dividend and selectively repurchasing our common shares. Specifically, we accomplished the following during 2013:

Increased our total cash balance to $1.7 billion;

Proactively reduced our outstanding debt by $461.4 million;

Increased our existing share repurchase authorization by $250.0 million and retired $127.7 million of shares;

Reinstated a quarterly dividend;

Increased our land investment spending to support future growth; and

            Lowered our ratio of debt to total capitalization from 53.4% to
             30.7%, in part due to the reversal of a valuation allowance against
             our deferred tax assets.

In the short-term, we will continue to focus on maximizing our operating margins, despite the possibility of rising house cost pressures from material and labor prices, by using our existing land assets more effectively, allocating capital more effectively, and aggressively controlling unsold "spec" inventory to enhance our balance sheet. We believe we have positioned ourselves to deliver improved long-term returns. In planning for the longer term, we continue to maintain confidence that we are in the early stages of a broad, sustainable recovery in the U.S. new home market. While the U.S. macroeconomic environment continues to face challenges and each local market will experience varying results, we are continuing to pursue strategic land positions that meet our underwriting requirements in well-positioned submarkets and believe that sustained execution of our strategy will continue to result in increased profits and improved returns on invested capital over the housing cycle.


The following is a summary of our operating results by line of business ($000's omitted, except per share data):

                                                       Years Ended December 31,
                                                 2013            2012            2011
Income (loss) before income taxes:
Homebuilding                                 $   479,113     $   157,991     $  (275,830 )
Financial Services                                48,709          25,563         (34,470 )
Income (loss) from continuing operations
before income taxes                              527,822         183,554        (310,300 )
Income tax expense (benefit)                  (2,092,294 )       (22,591 )       (99,912 )
Net income (loss)                            $ 2,620,116     $   206,145     $  (210,388 )
Per share data - assuming dilution:
Net income (loss)                            $      6.72     $      0.54     $     (0.55 )

The Homebuilding income (loss) before income taxes included charges related to the following items ($000's omitted):

                                             2013              2012              2011
Land-related charges (see   Note 4  )   $       9,672     $      17,195     $      35,786
Loss on debt retirements (see   Note
7  )                                           26,930            32,071             5,638
Settlement of contractual dispute at a         41,170                 -                 -
closed-out community (see   Note 13  )
Goodwill impairments (see   Note 2  )               -                 -           240,541
                                        $      77,772     $      49,266     $     281,965

For additional information on each of the above, see the applicable Notes to the Consolidated Financial Statements.

Our Homebuilding operating results in 2013 and 2012 improved significantly from the loss experienced in 2011 due to higher revenues and gross margins, improved overhead leverage, and lower charges, as listed in the above table.

The increase in Financial Services income in 2013 compared with 2012 and 2011 was primarily due to lower loan loss reserves. There were no such loss reserves in 2013 compared with $49.0 million in 2012 and $59.3 million in 2011 (see Note 13 to the Consolidated Financial Statements). Additionally, loan origination volume increased in 2013 compared with 2012 and 2011, primarily as the result of increased Homebuilding closings. These favorable factors were partially offset in 2013 by margin compression caused by heightened competition in the mortgage industry compared with 2012.

The income tax benefit in 2013 includes $2.1 billion related to the reversal of substantially all of the valuation allowance previously recorded against our deferred tax assets. See Note 10 to the Condensed Consolidated Financial Statements for additional information. The income tax benefits in 2012 and 2011 were attributable primarily to the favorable resolution of certain federal and state income tax matters.


Homebuilding Operations

The following is a summary of income (loss) before income taxes for our
Homebuilding operations ($000's omitted):
                                                        Years Ended December 31,
                                               FY 2013 vs.                     FY 2012 vs.
                                  2013           FY 2012          2012           FY 2011          2011
Home sale revenues            $ 5,424,309           19  %     $ 4,552,412           15  %     $ 3,950,743
Land sale revenues                114,335            7  %         106,698           29  %          82,853
Total Homebuilding revenues     5,538,644           19  %       4,659,110           16  %       4,033,596
Home sale cost of revenues
(a)                             4,310,528           12  %       3,833,451           11  %       3,444,398
Land sale cost of revenues
(b)                               104,426           10  %          94,880           60  %          59,279
Selling, general, and
administrative expenses
("SG&A") (c)                      568,500           11  %         514,457           (1 )%         519,583
Equity in (earnings) loss of
unconsolidated entities              (993 )        (74 )%          (3,873 )         21  %          (3,194 )
Other expense, net (d)             80,753           22  %          66,298          (77 )%         293,102
Interest income, net               (3,683 )        (10 )%          (4,094 )          9  %          (3,742 )
Income (loss) before income
taxes                         $   479,113          203  %     $   157,991          157  %     $  (275,830 )
Supplemental data:
Gross margin from home sales         20.5 %    470 bps               15.8 %    300 bps               12.8 %
SG&A as a percentage of home                                                     (190)
sale revenues                        10.5 %   (80) bps               11.3 %        bps               13.2 %
Closings (units)                   17,766            8  %          16,505            8  %          15,275
Average selling price         $       305           11  %     $       276            7  %     $       259
Net new orders:
Units                              17,080          (10 )%          19,039           25  %          15,215
Dollars (e)                   $ 5,394,566           (1 )%     $ 5,424,300           37  %     $ 3,953,829
Cancellation rate                      15 %                            15 %                            19 %
Active communities at
December 31                           577          (14 )%             670           (4 )%             700
Backlog at December 31:
Units                               5,772          (11 )%           6,458           65  %           3,924
Dollars                       $ 1,901,796           (2 )%     $ 1,931,538           82  %     $ 1,059,649

(a) Includes the amortization of capitalized interest. Home sale cost of revenues also includes land impairments of $2.9 million, $13.4 million, and $15.9 million for 2013, 2012, and 2011, respectively.

(b) Includes net realizable value adjustments for land held for sale of $3.6 million, $1.5 million, and $9.8 million for 2013, 2012, and 2011, respectively.

(c) SG&A includes costs associated with the relocation of our corporate headquarters totaling $15.0 million in 2013.

(d) Includes the write-off of deposits and pre-acquisition costs for land option contracts we elected not to pursue of $3.1 million, $2.3 million, and $10.0 million in 2013, 2012, and 2011, respectively, and net losses related to the redemption of debt totaling $26.9 million, $32.1 million, and $5.6 million in 2013, 2012, and 2011, respectively. Also includes charges resulting from a contractual dispute related to a previously completed luxury community totaling $41.2 million in 2013 and goodwill impairment charges of $240.5 million in 2011.

(e) Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.


Home sale revenues

Home sale revenues for 2013 were higher than 2012 by $871.9 million, or 19%. The increase was attributable to an 11% increase in the average selling price combined with an 8% increase in closings. The increase in average selling price occurred in substantially all of our local markets and reflects an ongoing shift in our revenue mix toward move-up and active adult buyers and improved market conditions that have allowed for increased sale prices, including higher levels of house options and lot premiums. The increase in closings reflected improved consumer demand for new homes in the majority of our local markets.

Home sale revenues for 2012 were higher than 2011 by $601.7 million, or 15%. The increase was attributable to a 7% increase in the average selling price combined with an 8% increase in closings. The increase in average selling price reflected a shift in our revenue mix toward move-up and active adult buyers and improved market conditions. The increase in closings was concentrated primarily in our North and Southwest segments.

Home sale gross margins

Home sale gross margins were 20.5% in 2013, compared with 15.8% in 2012 and 12.8% in 2011. Gross margins during 2013 and 2012 benefited from lower land impairments of $2.9 million and $13.4 million, respectively, compared with $15.9 million in 2011. Excluding the impact of land impairments and capitalized interest amortization, adjusted home sale gross margins improved to 25.2% in 2013 from 20.9% in 2012 and 17.9% in 2011 (see the Non-GAAP Financial Measures section for a reconciliation of adjusted home sale gross margins). The gross margin improvement was broad-based as substantially all of our operating divisions experienced higher gross margins in 2013 compared with the prior year periods. These improved gross margins reflect a combination of factors, including an improved pricing environment, shifts in the product mix of homes closed toward move-up and active adult buyers, better alignment of our product offering with consumer demand, and contributions from our strategic pricing and house cost reduction initiatives.

Land sales

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales had margin contributions of $9.9 million, $11.8 million, and $23.6 million in 2013, 2012, and 2011, respectively. These margin contributions included net realizable value adjustments related to land held for sale totaling $3.6 million, $1.5 million, and $9.8 million in 2013, 2012, and 2011, respectively.

SG&A

SG&A as a percentage of home sale revenues dropped to 10.5% in 2013 from 11.3% in 2012, and 13.2% in 2011. The gross dollar amount of our SG&A increased $54.0 million, or 11%, in 2013 compared with 2012. SG&A includes $15.0 million of employee severance, retention, relocation, and related costs attributable to our previously announced relocation of our corporate headquarters. The remaining increases in gross overhead dollars were primarily due to variable costs related to the higher revenue volume combined with higher incentive compensation accruals resulting from the Company's improved operating performance.

The gross dollar amount of our SG&A decreased $5.1 million, or 1%, in 2012 compared with 2011 due to improved overhead leverage, partially offset by higher incentive compensation resulting from our improved operating results.

Equity in (earnings) loss of unconsolidated entities

Equity in (earnings) loss of unconsolidated entities was $(1.0) million, $(3.9) million, and $(3.2) million for 2013, 2012, and 2011, respectively. The majority of our unconsolidated entities represent land development joint ventures. As a result, the timing of income and losses varies between periods depending on the timing of transactions and circumstances specific to each entity.


Other expense, net

Other expense, net includes the following ($000's omitted):

                                                 2013            2012            2011
Write-offs of deposits and pre-acquisition
costs   (Note 4)                             $     3,122     $     2,278     $    10,002
Loss on debt retirements   (Note 7)               26,930          32,071           5,638
Lease exit and related costs                       2,778           7,306           9,900
Amortization of intangible assets   (Note
1)                                                13,100          13,100          13,100
Goodwill impairments   (Note 2)                        -               -         240,541
Miscellaneous expense, net                        34,823          11,543          13,921
                                             $    80,753     $    66,298     $   293,102

For additional information on each of the above, see the applicable Notes to the Consolidated Financial Statements. Miscellaneous expense, net includes charges of $41.2 million in 2013 resulting from a contractual dispute related to a previously completed luxury community, and $5.1 million in 2012 and $17.1 million in 2011 related to the write-down of notes receivable.

Interest income, net

Interest income, net for 2013 decreased from the prior year based on the level of invested cash balances and low returns on invested cash available in the current interest rate environment.

Net new orders

Net new orders decreased 10% in 2013 compared with 2012 primarily due to selling from 14% fewer active communities in 2013 (577 at December 31, 2013) combined with slowed demand in the second half of 2013 in response to higher home prices and a rise in mortgage interest rates. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was unchanged from 2012 to 2013 at 15%. Ending backlog units, which represent orders for homes that have not yet closed, decreased 11% at December 31, 2013 compared with December 31, 2012, due to the decrease in net new orders but only decreased by 2% over the prior year period as measured in dollars due to the increase in our average selling price.

Net new order levels increased 25% in 2012 compared with 2011 while selling from 4% fewer active communities in 2012 (we had 670 active communities at December 31, 2012). The cancellation rate was 15% in 2012 compared with 19% in 2011. Ending backlog units increased 65% at December 31, 2012 compared with December 31, 2011 due to the decrease in net new orders.

Homes in production

The following is a summary of our homes in production at December 31, 2013 and 2012:

                      2013     2012
Sold                 3,723    4,162
Unsold
Under construction     813      753
Completed              338      503
                     1,151    1,256
Models               1,034    1,119
Total                5,908    6,537

The number of homes in production at December 31, 2013 was 10% lower than at December 31, 2012. The reduced level of homes in production is consistent with our lower active community count and our inventory management strategies. Reducing our reliance on sales of spec homes is a component of our strategic pricing and inventory turns objectives, so we have focused on reducing the level of our spec home inventory, especially our completed specs ("final specs").


Controlled lots

The following is a summary of our lots under control at December 31, 2013 and 2012:

                        December 31, 2013                     December 31, 2012
                 Owned     Optioned    Controlled      Owned     Optioned    Controlled
Northeast        7,423       2,762        10,185       9,211       2,655        11,866
Southeast       12,702       4,296        16,998      13,372       2,756        16,128
Florida         21,805       6,956        28,761      23,906       3,689        27,595
Texas           12,038       3,860        15,898      12,218       3,685        15,903
North           11,785       7,952        19,737      12,946       2,603        15,549
Southwest       29,459       2,440        31,899      31,407       1,427        32,834
Total           95,212      28,266       123,478     103,060      16,815       119,875

Developed (%)       24 %        18 %          23 %        27 %        34 %          28 %

Of our controlled lots, 95,212 and 103,060 were owned and 28,266 and 16,815 were under land option agreements at December 31, 2013 and 2012, respectively. While competition for well-positioned land has increased, we continue to pursue strategic land positions that meet our underwriting requirements while also using our existing land assets more effectively.

The remaining purchase price under our land option agreements totaled $1.4 billion at December 31, 2013. These land option agreements, which generally may be canceled at our discretion and in certain cases extend over several years, are secured by deposits and pre-acquisition costs totaling $91.0 million, of which only $4.5 million is refundable.


Non-GAAP Financial Measures

This report contains information about our home sale gross margins reflecting certain adjustments. This measure is considered a non-GAAP financial measure under the SEC's rules and should be considered in addition to, rather than as a substitute for, the comparable GAAP financial measure as a measure of our operating performance. Management and our local divisions use this measure in evaluating the operating performance of each community and in making strategic decisions regarding sales pricing, construction and development pace, product mix, and other daily operating decisions. We believe it is a relevant and useful measures to investors for evaluating our performance through gross profit generated on homes delivered during a given period and for comparing our operating performance to other companies in the homebuilding industry. Although other companies in the homebuilding industry report similar information, the methods used may differ. We urge investors to understand the methods used by other companies in the homebuilding industry to calculate gross margins and any adjustments thereto before comparing our measure to that of such other companies.

The following table sets forth a reconciliation of this non-GAAP financial measure to the GAAP financial measure that management believes to be most directly comparable ($000's omitted):

Adjusted home sale gross margin
                                                          Years Ended December 31,
                                                    2013            2012            2011
Home sale revenues                              $ 5,424,309     $ 4,552,412     $ 3,950,743
Home sale cost of revenues                        4,310,528       3,833,451       3,444,398
Home sale gross margin                            1,113,781         718,961         506,345
Add:
Land impairments (a)                                      -           6,969          10,498
Capitalized interest amortization (a)               255,065         224,291         189,382
Adjusted home sale gross margin                 $ 1,368,846     $   950,221     $   706,225

Home sale gross margin as a percentage of home
sale revenues                                          20.5 %          15.8 %          12.8 %
Adjusted home sale gross margin as a percentage
of home sale revenues                                  25.2 %          20.9 %          17.9 %

(a) Write-offs of capitalized interest related to land impairments are reflected in capitalized interest amortization.

Homebuilding Segment Operations

Our homebuilding operations represent our core business. Homebuilding offers a
broad product line to meet the needs of homebuyers in our targeted markets. As
of December 31, 2013, we conducted our operations in 48 markets located
throughout 27 states. For reporting purposes, our Homebuilding operations are
aggregated into six reportable segments:

Northeast:     Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New
               York, Pennsylvania,
               Rhode Island, Virginia
Southeast:     Georgia, North Carolina, South Carolina, Tennessee
Florida:       Florida
Texas:         Texas
North:         Illinois, Indiana, Michigan, Minnesota, Missouri, Northern
               California, Ohio, Oregon, Washington
Southwest:     Arizona, Nevada, New Mexico, Southern California

We also have a reportable segment for our financial services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.


The following table presents selected financial information for our reportable Homebuilding segments:

                                            Operating Data by Segment ($000's omitted)
                                                     Years Ended December 31,
                                         FY 2013 vs. FY                    FY 2012 vs. FY
                             2013             2012             2012             2011             2011
Home sale revenues:
Northeast                $   784,087                8  %   $   722,691                1  %   $   714,609
Southeast                    842,856               22  %       689,163                2  %       675,124
Florida                      800,331               29  %       620,156               11  %       557,865
Texas                        804,806               21  %       666,759                8  %       615,319
North                      1,214,332               23  %       989,510               36  %       727,085
Southwest                    977,898               13  %       864,133               31  %       660,741
                         $ 5,424,309               19  %   $ 4,552,412               15  %   $ 3,950,743
Income (loss) before
income taxes:
Northeast                $   110,246               50  %   $    73,345              150  %   $    29,320
Southeast                    121,055               87  %        64,678               44  %        45,060
Florida                      139,673               90  %        73,472               63  %        44,946
Texas                        111,431               83  %        60,979               83  %        33,329
North                        164,348               94  %        84,597              (b)          (12,376 )
Southwest                    179,163              124  %        79,887              118  %        36,647
Other homebuilding (a)      (346,803 )            (24 )%      (278,967 )             38  %      (452,756 )
                         $   479,113              203  %   $   157,991              157  %   $  (275,830 )
Closings (units):
Northeast                      1,835                2  %         1,800               (4 )%         1,880
Southeast                      3,022               10  %         2,757               (1 )%         2,771
Florida                        2,747               17  %         2,340                4  %         2,251
Texas                          3,768                8  %         3,487                5  %         3,327
North                          3,401               10  %         3,103               20  %         2,579
Southwest                      2,993               (1 )%         3,018               22  %         2,467
                              17,766                8  %   $    16,505                8  %        15,275
Average selling price:
. . .
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