SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2001OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9804
PULTE HOMES, INC.(Exact name of registrant as specified in its charter)
33 Bloomfield Hills Pkwy., Suite 200,Bloomfield Hills, Michigan 48304
Registrant’s telephone number, including area code (248) 647-2750
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
YES NO
Number of shares of common stock outstanding as of October 31, 2001: 58,925,168
Total pages: 38
Listing of exhibits: 35
TABLE OF CONTENTS
PULTE HOMES, INC.
INDEX
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PART 1. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
PULTE HOMES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS($000’s omitted)
Note: The balance sheet at December 31, 2000, was derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying Notes to Condensed Consolidated Financial Statements.
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PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF INCOME(000’s omitted, except per share data)(Unaudited)
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PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY($000’s omitted)(Unaudited)
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PULTE HOMES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS($000’s omitted)(Unaudited)
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS($000’s omitted)(Unaudited)
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)($000’s omitted, except per share information)(Unaudited)
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)($000’s omitted)(Unaudited)
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(000’s omitted, except per share data)(Unaudited)
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CONDENSED CONSOLIDATING BALANCE SHEETSEPTEMBER 30, 2001
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CONDENSED CONSOLIDATING BALANCE SHEETDecember 31, 2000
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CONSOLIDATING STATEMENT OF OPERATIONSFor the nine months ended September 30, 2001
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7. Supplemental guarantor information (continued)
CONSOLIDATING STATEMENT OF OPERATIONSFor the nine months ended September 30, 2000
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended September 30, 2001
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended September 30, 2000
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the nine months ended September 30, 2001
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the nine months ended September 30, 2000
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS($000’s omitted, except per share data)
Overview:
A summary of the Company’s operating results by business segment for the three and nine month periods ended September 30, 2001 and 2000 is as follows:
A comparison of pre-tax income (loss) for the three and nine month periods ended September 30, 2001 and 2000 is as follows:
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)($000’s omitted)
Homebuilding Operations:
The Company’s Homebuilding segment consists of the following business lines:
The metropolitan Phoenix market accounted for 10% of the total Domestic Homebuilding unit net new orders and revenues; and 11% of unit settlements for the three month period ended September 30, 2001. No other individual market represented more than 10% of total Domestic Homebuilding net new orders, unit settlements or revenues during this period. No individual market represented 10% in any of the categories discussed for the nine month period ended September 30, 2001. The metropolitan Atlanta market accounted for 10% of the unit net new orders and unit settlements for the three and nine month periods ended September 30, 2000.
Certain operating data relating to the Company’s joint ventures and homebuilding operations for the three and nine months ended September 30, 2001 and 2000, are as follows:
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Homebuilding Operations: (continued)
Domestic Homebuilding:
The Domestic Homebuilding business line represents the Company’s core business. Operations are conducted in 44 markets, located throughout 26 states, and are organized as follows:
The following table presents selected unit information for Pulte’s Domestic Homebuilding operations for the three and nine months ended September 30, 2001 and 2000.
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Homebuilding Operations (continued):
Domestic Homebuilding (continued):
Unit settlements increased more than 1,300 units and 900 units, respectively for the quarter and nine month periods ended September 30, 2001, over the prior year. This increase is primarily a result of including Del Webb’s operations beginning in August 2001. The increases in net new orders are due to the incorporation of Del Webb’s operations, including an acquired backlog of 3,823 units which are a component of these totals. The inclusion of Del Webb’s operations also account for the increases in unit and dollar backlog as of September 30, 2001.
The following table presents a summary of pre-tax income for Pulte’s Domestic Homebuilding operations for the three and nine months ended September 30, 2001 and 2000:
Purchase accounting associated with the acquisition of Del Webb adversely impacted Homebuilding gross profit margins. Homebuilding gross profit margins were 20.1% (including the effect of purchase accounting) and 20.7% (excluding the effect of purchase accounting) for the three months ended September 30, 2001, compared to 18.7% in the prior year. For the nine month period ending September 30, 2001, homebuilding gross profit margins were 20.1% (including the effect of purchase accounting) and 20.4% (excluding the effect of purchase accounting), compared to 18.4% in the prior year. A higher average sales price, lower operating costs and lower material costs contributed to the increases in gross margin.
Land sales increased over the prior year for both the three and nine month periods representing the Company’s land development core competency which includes development and entitlement of certain land positions for sale primarily to other homebuilders, as well as to retail and commercial establishments. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of future land sales. The Company continues its efforts to rationalize certain existing land positions to ensure the most effective use of invested capital.
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As a percentage of total revenues, selling, general and administrative expenses increased 30 basis points for both the three and nine month periods ended September 30, 2001. The increase reflects higher startup costs associated with the opening of new communities, increased compensation related expenses and the inclusion of Del Webb. The increase in other expense for the quarter ended September 30, 2001, is primarily a result of the amortization of certain purchase accounting adjustments. Prior year data also included insurance settlement recoveries which did not occur during the third quarter of 2001. For the nine month period, other expense, net, increased slightly as the amortization of purchase accounting adjustments was offset by insurance recoveries earlier in the first six months of 2001.
The average selling price for the three and nine month periods ended September 30, 2001, was $230 and $222, respectively, an increase from the average selling price of $209 and $202 in the comparable periods of the prior year. Changes in average selling price reflect a number of factors, including changes in market selling prices and the mix of product closed during a period, as well as, the inclusion of Del Webb product which sells at higher prices.
Pulte’s Domestic Homebuilding operations controlled approximately 120,400 and 69,900 lots for use in its homebuilding operations at September 30, 2001 and 2000, respectively. The increase reflects the inclusion of Del Webb lots acquired. Of the total lots controlled, approximately 87,700 and 41,700 lots were owned, and approximately 32,700 and 28,200 lots were controlled through option agreements at the end of each period. Domestic Homebuilding inventory at September 30, 2001, was approximately $3,908,400 of which $2,873,500 is related to land and land development. At September 30, 2000, inventory was approximately $2,014,600 of which $1,331,500 was related to land and land development. Included in other assets is approximately $274,000 in land held for disposition as of September 30, 2001 as compared to $92,000 at September 30, 2001.
International Homebuilding:
International Homebuilding operations are primarily conducted through subsidiaries of Pulte International Corporation (International) in Mexico, Puerto Rico and Argentina.
Mexico International’s 100%-owned subsidiary, Pulte International-Mexico, Inc., conducts its operations primarily through five joint ventures located throughout Mexico. Its net investment in these joint ventures approximated $44,900 at September 30, 2001. The largest of these ventures, Condak-Pulte S. De R.L. De C.V. (Condak-Pulte), is based in Cuidad Juarez. Condak-Pulte is currently developing communities in Juarez, Chihuahua, Nuevo Laredo, Monterrey, Reynosa and Matamoros, under agreements with Delphi Automotive Systems, Sony Magneticos de Mexico, S.A. de C.V., an affiliate of Sony Electronics, Inc. and Centro Comerciales Soriana, S.A. De C. V. As of September 30, 2001, International’s net investment in Condak-Pulte approximated $36,700.
Desarrollos Residenciales Turisticos, S.A. de C.V., another of its joint ventures in Mexico, is constructing primarily social interest housing in Central Mexico. Current development plans for this venture include housing projects in the Bajio region surrounding Mexico City, targeting the cities of Puebla, Queretaro, San Jose du Iturbide, San Juan del Rio and Zamora. At September 30, 2001, International’s net investment in this joint venture approximated $7,000.
Puerto Rico Operations in Puerto Rico are primarily conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation. Desarrolladores Urbanos (Canovanas), S.E., its Puerto Rican joint venture is developing 121 acres located in Metropolitan San Juan. At September 30, 2001, its net investment in this joint venture approximated $3,900.
Argentina Operations in Argentina are conducted through Pulte SRL, International’s 100%-owned Argentine subsidiary which recorded its first closings during the second quarter of 2001.
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International Homebuilding (continued):
The following table presents selected financial data for Pulte’s International Homebuilding operations for the three and nine month periods ended September 30, 2001 and 2000.
Increased revenues during 2001 are a result of increased settlements in Puerto Rico and the opening of operations in Argentina. These settlements were concentrated more in middle-market housing than in social interest housing which resulted in a higher average selling price per closing, increasing total revenues. The pre-tax losses for both the three and nine month periods ending September 30, 2001 were a result of decreased closings from the Mexican operations where changes in government lending practices slowed mortgage funding along with higher selling, general and administrative expense related to start-up costs in Argentina. It is anticipated that the rate of mortgage funding in Mexico will accelerate during the fourth quarter of 2001, which should increase the pace of closings over what was experienced during the first nine months of the year.
Financial Services Operations:
The Company conducts its financial services operations principally through Pulte Mortgage Corporation (PMC), the Company’s mortgage banking subsidiary. Pre-tax income of the Company’s financial services operations for the three and nine month periods ended September 30, 2001, was $6,977 and $18,192, respectively compared to $5,215 and $12,119, respectively in the prior year. This growth is primarily a result of increased capture rates, a favorable mortgage product mix and the inclusion of Del Webb’s mortgage operations.
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Financial Services Operations (continued):
The following table presents mortgage origination data for the Company’s mortgage operations:
Mortgage origination unit volume for the three and nine month periods ended September 30, 2001, increased 45% and 35%, respectively, from the comparable 2000 periods as the Company realized an increase in capture rate due to improved market penetration in those markets that the Company’s mortgage operations entered last year. Pulte’s capture rate for the quarter ended September 30, 2001 was 74% compared to 64% in the prior year and 73% and 61%, respectively, for the three and nine month periods then ended.
Refinancings represented 10% of PMC’s total loan originations for the nine month period ended September 30, 2001, as compared to 2% of total loan originations for 2000. For the three and nine month periods ended September 30, 2001, pricing and marketing gains increased $5,035 and $13,684, respectively, due to higher production volume and a favorable production mix. Increased general and administrative expenses of $2,547 and $6,832 for the three and nine month periods, respectively, were primarily due to higher production and the integration of new markets which partially offset these pricing and marketing gains during 2001. At September 30, 2001, loan application backlog increased 52% to $1,086,000 as compared with $716,000 at September 30, 2000. Pulte continues to hedge its mortgage pipeline in the normal course of its business and there has been no change in PMC’s strategy or use of derivative financial instruments in this regard.
Financial Accounting Standards Board Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by Financial Accounting Standards Board Statement No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or a cash flow hedge.
The Company hedges portions of its forecasted cash flow from sales of closed mortgage loans with derivative financial instruments. For the nine months ended September 30, 2001, the Company did not recognize any net gains or losses related to the ineffective portion of the hedging instrument excluded from the assessment of hedge effectiveness. The Company also did not recognize any gains or during 2001, for cash flow hedges that were discontinued because it is probable that the original forecasted transaction will not occur. At September 30, the Company expects to reclassify $827, net of taxes, of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next twelve months from sales of closed mortgage loans.
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Corporate:
Corporate is a non-operating business segment whose primary purpose is to support the operations of the Company’s subsidiaries as the internal source of financing, to develop and implement strategic initiatives centered on new business development and operating efficiencies, and to provide the administrative support associated with being a publicly traded entity. As a result, the corporate segment’s operating results will vary from quarter to quarter as these strategic initiatives evolve.
The following table presents corporate results of operations for the three and nine months ended September 30, 2001 and 2000:
Pre-tax loss of the Company’s corporate business segment increased $3,446 and $3,271, respectively, from the three and nine month periods ended September 30, 2000. The increase in pre-tax loss for the quarter primarily reflects an increase of approximately $1,500 in the corporate net interest spread and an increase in other corporate expenses, net of approximately $1,900. Year-to-date results reflect an increase of approximately $1,600 in both the corporate net interest spread and in other corporate expenses, net. Increases in the corporate net interest spread, which is net of interest capitalized into inventory, are attributed to a higher debt balance as a result of the Del Webb acquisition in addition to the issuance in August 2001 of $500,000 in Senior Notes, primarily for use in repaying certain indebtedness acquired in the Del Webb acquisition and other acquisition related expenses. Interest incurred for the three and nine months ended September 30, 2001, excluding interest incurred by the Company’s financial services operations, was approximately $37,500 and $73,000, respectively. Other corporate expenses, net, reflect increased compensation related expenditures.
Information related to interest in inventory is as follows:
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)($000’s omitted, except per share data)
Liquidity and Capital Resources:
Continuing Operations:
The Company’s net cash used in operating activities amounted to $418,915, reflecting increased income from continuing operations offset by an increase in the use of operating funds as compared with the same period last year. This increase in the use of operating funds is primarily attributable to increases in inventory levels resulting from land purchases. Net cash provided by investing activities was $6,915 for the nine months ended September 30, 2001 as cash acquired in the acquisition of Del Webb was greater than the cash paid. Net cash provided by financing activities was $287,769 in 2001, as compared to $62,026 in 2000, which primarily reflects the Company’s issuance of $500,000 Senior Notes in August 2001 partially offset by the repayment of Del Webb’s revolving credit facility and a portion of their outstanding senior subordinated debentures.
The Company finances its land acquisition, development and construction activities from internally generated funds and existing credit agreements. In July 2001, the Company expanded its revolving credit facilities to a total of $560,000 as allowed under the credit agreements, in contemplation of its acquisition of Del Webb Corporation. The Company had $61,500 of borrowings under its $560,000 unsecured revolving credit facilities at September 30, 2001. PMC provides mortgage financing for many of its home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements which, at September 30, 2001, amounted to $500,000. There were approximately $277,000 of borrowings outstanding under the PMC arrangement at September 30, 2001. Mortgage loans originated by PMC are subsequently sold to outside investors. The Company anticipates that there will be adequate mortgage financing available for purchasers of its homes.
At September 30, 2001, the Company had cash and equivalents of $59,754 and total long-term indebtedness of $1,894,878. Long-term indebtedness includes $1,882,775 of unsecured senior notes and other Pulte limited recourse debt of $12,103. The Company also had other non-recourse short-term notes payable of $77,352 and First Heights advances of $760.
The Company’s income tax liabilities are affected by a number of factors. Management anticipates that the Company’s effective tax rate for 2001 will be between 38% and 39%.
In August 2001, the Company sold in a private placement pursuant to Rule 144A under the Securities Act, $500,000 of 7 7/8% Senior Notes due in 2011. In the fourth quarter of 2001, the Company anticipates filing an S-4 Registration Statement with the Securities and Exchange Commission, offering to exchange the original unregistered Notes for registered Notes. Net proceeds received from the sale were used to repay certain indebtedness acquired in the Del Webb transaction, to pay certain expenses associated with that transaction and for general corporate purposes.
Sources of the Company’s working capital at September 30, 2001, include its cash and equivalents and its $560,000 unsecured revolving credit facilities. The Company routinely monitors current operational requirements and financial market conditions to evaluate the utilization of available financing sources, including securities offerings. The Company anticipates the filing of a universal shelf registration statement with the Securities and Exchange Commission during 2002.
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Liquidity and Capital Resources (continued):
Discontinued Operations:
The Company’s remaining investment in First Heights at September 30, 2001 approximated $30,900. The Company’s thrift assets are subject to regulatory restrictions and a court order and thus are not available for general corporate purposes. The final liquidation of the Company’s thrift operations is dependent on the final resolution of outstanding matters with the Federal Deposit Insurance Corporation (FDIC), manager of the FSLIC Resolution Fund. As discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, the Company settled its litigation with the FDIC and, as part of the settlement, the Company agreed to pay to the FDIC $41,500 and all obligations under the LAN and the FRF notes have been extinguished.
Inflation:
The Company and the homebuilding industry in general, may be adversely affected during periods of high inflation, because of higher land and construction costs. Inflation also increases the Company’s financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. The Company attempts to pass through to its customers any increases in its costs through increased sales prices and, to date, inflation has not had a material adverse effect on the Company’s results of operations. However, there is no assurance that inflation will not have a material adverse impact on the Company’s future results of operations.
Acquisition of Del Webb Corporation
On July 31, 2001, the Company acquired Del Webb Corporation as discussed in Note 6 to the Notes to Condensed Consolidated Financial Statements. Under the terms of Del Webb’s senior subordinated debentures, the Company was required, under the applicable indentures as a result of the change in control, to offer to purchase four series of its senior subordinated debentures. As of September 30, 2001, the Company had repurchased, through tender offers and open-market purchases, $96,265 of these debentures. The Company also repurchased Del Webb’s $100,000, 93/4%, due 2003, senior subordinated debentures during the third quarter. In addition, as of July 31, 2001, the Company paid off and cancelled Del Webb’s revolving credit facility which had a balance of approximately $300,000.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative disclosure:
The Company is subject to interest rate risk on its long term debt. The Company seeks to minimize its interest rate exposure by using variable rate financing; however, the Company runs the risk of interest rate declines with respect to its fixed rate long term corporate debt instruments. The following table sets forth, as of September 30, 2001, the Company’s long term debt obligations, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market value ($000’s omitted):
Qualitative disclosure:
This information is set forth on pages 26 and 27 of Part II, of Item 7A.,Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and is incorporated herein by reference.
Forward-Looking Statements:
As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 3., “Quantitative and Qualitative Disclosures About Market Risk,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such matters involve risks and uncertainties, including:
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4, Notes to Condensed Consolidated Financial Statements, which is contained in Part I, Item 1, of this Quarterly Report on Form 10-Q and which is incorporated by reference into this response.
Item 4. Submission of Matters to a Vote of Security Holders
The following matter was voted upon at a special meeting of the shareholders of Pulte Homes, Inc. held on July 27, 2001, and received the votes set forth below:
Proposal to issue Pulte common shares in exchange for Del Webb common stock in connection with the merger and upon exercise of Del Webb options which remain outstanding after completion of the merger.
Item 6. Exhibits and Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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