SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
o 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)
100 Bloomfield Hills Pkwy., Suite 300,Bloomfield Hills, Michigan 48304(Address of principal executive offices) (Zip Code)
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 x NO o
Number of shares of common stock outstanding as of July 31, 2002: 61,193,265
Total pages: 32
Listing of exhibits: 30
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TABLE OF CONTENTS
PULTE HOMES, INC.
INDEX
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PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
PULTE HOMES, INC.CONDENSED CONSOLIDATED BALANCE SHEETS($000’s omitted)
Note: The balance sheet at December 31, 2001, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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(Unaudited)
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In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Under the provisions of SFAS No. 145, gains and losses from extinguishment of debt can only be classified as extraordinary items if they meet the criteria in APB Opinion No. 30. This Statement also amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar. Finally, this Statement amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Certain provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002. All other provisions of this Statement will be effective for fiscal years beginning after May 15, 2002. Early application of all the provisions of this Statement is encouraged. SFAS No. 145 is not expected to have a material effect on the Company’s consolidated results of operations, financial position or cash flows.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which supercedes EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan as was required by EITF No. 94-3. This statement is effective for disposal activities initiated after December 31, 2002, with early application encouraged. SFAS No. 146 is not expected to have a material effect on the Company’s consolidated results of operations or financial position.
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
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CONDENSED CONSOLIDATING BALANCE SHEETJUNE 30, 2002($000’s omitted)
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PULTE HOMES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
4. Supplemental Guarantor information (continued)
CONSOLIDATING BALANCE SHEETDECEMBER 31, 2001($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended June 30, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the six months ended June 30, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended June 30, 2001($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the six months ended June 30, 2001($000’s omitted)
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PULTE CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
CONSOLIDATING STATEMENT OF CASH FLOWSFor the six months ended June 30, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the six months ended June 30, 2001($000’s omitted)
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview:
A comparison of pre-tax income (loss) for the three and six month periods ended June 30, 2002 and 2001 is as follows:
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Homebuilding Operations:
Our homebuilding operations are organized into two distinct business units, Domestic and International:
Certain operating data relating to our homebuilding operations and Pulte-affiliated joint ventures for the three and six months ended June 30, 2002 and 2001, are as follows ($000’s omitted):
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Homebuilding Operations (continued):
Domestic Homebuilding:
The Domestic Homebuilding business unit represents our core business. Operations are conducted in 43 markets, located throughout 25 states, and are organized into five groups as follows:
Our metropolitan Phoenix operations accounted for 11% of Domestic Homebuilding unit net new orders and unit settlements, and 10% of Domestic Homebuilding settlement revenues for the three-month period ended June 30, 2002. For the six-month period, the metropolitan Phoenix operations accounted for 11% of unit net new orders, 12% of unit settlements and 11% of settlement revenues. No other individual market represented more than 10% of total Domestic Homebuilding unit net new orders, unit settlements or revenues for the three and six-month periods ended June 30, 2002 or 2001.
The following table presents selected unit information for our Domestic Homebuilding operations:
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Domestic Homebuilding (continued):
For the three months ended June 30, 2002, unit settlements increased 45% to 6,593 units. This increase was due to the inclusion of the acquired Del Webb operations, which contributed almost 1,700 units, and an 8% increase in the traditional Pulte operations. For the six-month period, unit settlements also increased 45% with the Del Webb operations contributing over 3,200 units along with a 6% increase in the traditional Pulte operations. Unit net new orders increased 60% and 41% for the three and six-month periods ended June 30, 2002, respectively. The Del Webb operations contributed approximately 2,100 and 3,900 units, respectively, while the traditional Pulte operations increased 19% and 7%, respectively. The average selling price for homes closed increased 9% to $239,000 for the three months ended June 30, 2002, and 10% to $239,000 for the six months then ended. The increase benefited from Del Webb product offerings, which sold for an average of $265,000 for the six month period ended June 30, 2002, while the traditional Pulte operations’ average selling price increased 6% over the same period. Ending backlog, which represents orders for homes that have not yet closed, grew to 12,950 units, including 3,800 Del Webb units. The dollar value of backlog was up 63% to nearly $3.3 billion.
The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three and six months ended June 30, 2002 and 2001 ($000’s omitted):
(a)The Company capitalizes interest cost into homebuilding inventories and charges the interest to homebuilding interest expense over a period that approximates the average life cycle of our communities.
Gross profit margins were 19.9% and 20.0%, respectively, for the three and six month periods ended June 30, 2002, compared to 20.1% and 20.0%, respectively, for the same periods in the prior year. Purchase accounting adjustments associated with the merger reduced gross margin by approximately $1.2 million, or 10 basis points for the three months ended June 30, 2002, and approximately $2.9 million, or 10 basis points for the six months then ended. As a percentage of home settlement revenue, selling, general and administrative expenses increased approximately 30 basis points for both the three and six-month periods ended June 30, 2002, reflecting the inclusion of Del Webb expenses in 2002. The change in other income (expense), net for both the three and six months ended June 30, 2002 is related to the amortization of certain purchase accounting adjustments. Additionally, both the three and six month periods ended June 30, 2001 includes income from a land development joint venture.
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We consider land development one of our core competencies. This includes the development and entitlement of certain land positions for sale primarily to other homebuilders, as well as to retail and commercial establishments. Land sales increased over the prior year due to the addition of the Del Webb operations. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of land sales. We continue to rationalize certain existing land positions to ensure the most effective use of invested capital.
Our Domestic Homebuilding operations controlled approximately 118,000 lots at June 30, 2002, of which approximately 83,700 lots were owned and approximately 34,300 lots were controlled through option agreements. At June 30, 2001, we controlled approximately 79,000 lots, of which approximately 44,200 lots were owned, and approximately 34,800 lots were controlled through option agreements.
Domestic Homebuilding inventory at June 30, 2002, was approximately $4.0 billion of which $3.1 billion was related to land and land development. At June 30, 2001, Domestic Homebuilding inventory approximated $2.2 billion, of which $1.6 billion was related to land and land development.
Included in other assets is $268.5 million in land held for disposition as of June 30, 2002, as compared to $177.5 million in the prior year.
In addition, there were approximately 26,700 lots valued at $673 million under option at June 30, 2002, pending approval, that are under review and evaluation for future use by our Domestic Homebuilding operations. This compared to 16,900 lots valued at $425 million at June 30, 2001.
International Homebuilding:
International Homebuilding operations are primarily conducted through subsidiaries of Pulte International Corporation in Mexico, Puerto Rico and Argentina.
Mexico Effective January 1, 2002, Pulte International reorganized its structure within Mexico to create a single company, Pulte Mexico, which ranks as one of the largest builders in the country. Prior to the reorganization, these operations were conducted primarily through five joint ventures throughout Mexico. Under the new ownership structure, which combines the largest of these entities, we own 63.8% of Pulte Mexico and have consolidated Pulte Mexico into our financial statements. The new operating structure facilitates growth, enables operating leverage and improves efficiencies through standardized systems and procedures.
Puerto Rico Operations in Puerto Rico are conducted through International’s 100%-owned subsidiary, Pulte International Caribbean Corporation and two joint ventures.
Argentina Operations in Argentina, which are based in the greater Buenos Aires area, are conducted through Pulte SRL, International’s 100%-owned Argentine subsidiary.
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International Homebuilding (continued):
The following table presents selected financial data for our International Homebuilding operations for the three and six months ended June 30, 2002 and 2001 ($000’s omitted):
Increased revenues in 2002 are due to the consolidation of the Mexican operations for five months of 2002 and a full period’s reflection of the Argentine operations, which had only begun recognizing its first closings in June of 2001. Revenues from the Mexican operations were $44 million and $62 million for the three and six-month periods ended June 30, 2002, respectively. The Argentine operations contributed $6 million and $10 million, respectively. The increases in cost of sales and selling, general and administrative expense are a result of the consolidation of the Mexican operations. Equity in income of joint ventures in 2002 represents one month of the Mexican joint venture operations and our Puerto Rican joint venture located in San Juan, which had its first closings during the third quarter of 2001.
Our Argentine operations recorded a $75,000 transaction loss for the six months ended June 30, 2002, as the value of the Argentine peso continued to fluctuate following the Argentine government’s decision to de-link its valuation from the U.S. Dollar. We also recorded a foreign currency translation loss of $14.4 million, as a component of other comprehensive income during the first six months of 2002. It remains unclear at this time how the Argentine financial and currency markets will be impacted for the remainder of 2002 or how the current economic situation may affect customer home buying attitudes and the homebuilding business in general. Our remaining net investment in Argentina at June 30, 2002, which is exposed to such risks, approximated $10.6 million.
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Financial Services Operations:
We conduct our financial services operations primarily through Pulte Mortgage Corporation (PMC), our mortgage banking subsidiary. Pre-tax income of our financial services operations for the three and six month periods ended June 30, 2002, was $16.2 million and $28.4 million, respectively, compared to $7.5 million and $14.2, respectively, for the prior year periods. This improvement in performance was a result of increased volume, a favorable interest rate environment, effective leverage of overhead costs and the inclusion of Del Webb’s mortgage operations.
The following table presents mortgage origination data for PMC:
Mortgage origination principal volume for the three and six month periods ended June 30, 2002, increased 31% and 34%, respectively, from the comparable 2001 periods due to an increase in capture rate and the inclusion of Del Webb volume. Del Webb accounted for $154 million and $297 million, respectively, of the total mortgage origination principal volume for the three and six-month periods ended June 30, 2002. Refinancings accounted for approximately 3% of total originations for the three months ended June 30, 2002, compared to 11% in the prior year. For the six months ended June 30, refinancings represented 5% of total originations in 2002 compared to 11% in 2001. Adjustable rate mortgages (ARMs) represented 11% of total originations for the three months ended June 30, 2002, compared to 3% in the prior year. ARMs represented 10% and 2% of total originations for the six months ended June 30, 2002 and 2001, respectively. Our Domestic Homebuilding customers continue to account for the majority of total loan production, representing 88% and 86%, respectively, of total PMC volume for the three and six-month periods ended June 30, 2002, compared to 77% and 74%, respectively, in the prior year. At June 30, 2002, loan application backlog increased 21% to $1.2 billion as compared with $991 million at June 30, 2001.
Income from our title operations increased to $2.7 million for the three months ended June 30, 2002, from $1.7 million in 2001, and to $4.9 million for the six months ended, from $3.0 million in 2001. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $1.2 million for the three months ended June 30, 2002, compared to $1.3 million in 2001, and $2.1 million for the six months ended June 30, 2002 compared to $2.2 million in 2001.
We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments. The effect of these derivative financial instruments continues to be immaterial to our financial position, results of operations and cash flows.
Corporate:
Corporate is a non-operating business segment which supports the operations of our subsidiaries by acting as the internal source of financing, developing and implementing strategic initiatives centered on new business development and operating efficiencies, and providing 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.
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Corporate (continued):
The following table presents corporate results of operations for the three and six months ended June 30, 2002 and 2001 ($000’s omitted):
The increase in pre-tax loss for Corporate was driven primarily by higher net interest expense due to higher indebtedness as a result of the Del Webb merger and the issuance of $300 million in new senior notes in June 2002. Interest incurred for the three and six-month periods ended June 30, 2002, excluding interest incurred by our financial services operations, was approximately $40.1 million and $79.2 million, respectively.
Corporate net interest expense is net of amounts capitalized into homebuilding inventories. Amounts capitalized are charged to homebuilding interest expense over a period that approximates the average life cycle of our communities. Information related to Corporate interest capitalized into inventory is as follows ($000’s omitted):
Liquidity and Capital Resources:
Our net cash provided by operating activities amounted to $82.5 million compared to a use of cash of $261.1 million in the prior year. An increase in net income, a smaller decrease in cash due to inventories and a larger decrease in PMC’s holdings of residential mortgage loans available-for-sale primarily drove this change. Net cash from investing activities was relatively consistent with the prior year. Net cash from financing activities decreased from $180.1 million in 2001 to $54.4 million in 2002, as proceeds from the issuance of $300 million senior notes were used for the repayment of certain Del Webb debt and our revolving credit facility.
We finance our homebuilding land acquisitions, development and construction activities from internally generated funds and existing credit agreements. We had no borrowings under our $570 million unsecured revolving credit facilities at June 30, 2002. 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 June 30, 2002, amounted to $400 million, an amount deemed adequate to cover foreseeable needs. There were approximately $273 million of borrowings outstanding under the $400 million PMC arrangement at June 30, 2002. Mortgage loans originated by PMC are subsequently sold to outside investors. We anticipate that there will be adequate mortgage financing available for purchasers of our homes.
Our income tax liabilities are affected by a number of factors. We anticipate that our effective tax rate for 2002 will approximate 39%.
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Liquidity and Capital Resources (continued):
In April 2002, we filed a $1 billion mixed securities shelf registration (Form S-3) with the Securities and Exchange Commission. Under this shelf registration we may sell up to $1 billion in various debt and equity securities. Net proceeds from the sale of these securities will be used for general corporate purposes, which may include debt repayments, capital expenditures, acquisitions or share repurchases.
On June 12, 2002, we sold $300 million of 7.875% senior notes, due 2032, from our $1 billion shelf registration. Cash provided by operations, combined with the net proceeds from this sale of senior notes were used to call and redeem approximately $70 million of Del Webb’s senior subordinated notes and to repay short-term borrowings under our revolving bank credit arrangements.
At June 30, 2002, we had cash and equivalents of $212.8 million and total long-term indebtedness of $1.9 billion. Sources of our working capital at June 30, 2002, include cash and equivalents, our $570 million committed unsecured revolving credit facilities and PMC’s $400 million revolving credit facilities. Our debt-to-total capitalization, excluding our non-guarantor asset secured borrowings, was approximately 44% as of June 30, 2002, and approximately 41% on a net basis. We expect to manage our net debt-to-total capitalization to the 40% level by the end of 2002. It is our intent to exercise, over time, the early call provisions of the senior subordinated notes issued by Del Webb, as allowed under these notes. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financial sources, including securities offerings.
Inflation:
We, 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 our financing, labor and material costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. We attempt to pass through to our customers any increases in our costs through increased sales prices and, to date, inflation has not had a material adverse effect on our results of operations. However, there is no assurance that inflation will not have a material adverse impact on our future results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative disclosure:
We are subject to interest rate risk on our long-term debt. We seek to minimize our interest rate exposure by using variable rate financing; however, we run the risk of interest rate declines with respect to our fixed rate long term corporate debt instruments. The following table sets forth, as of June 30, 2002, our 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 can be found on page 28 of Part II, of Item 7A.,Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, 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 4. Submission of Matters to a Vote of Security Holders
The Company’s Annual Meeting of Shareholders was held on May 15, 2002. The following matters were considered and acted upon, with the results indicated below.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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PART II. OTHER INFORMATION (continued)
(a) Exhibits (continued)
(b) Report on Form 8-K
On June 6, 2002, we filed a Current Report on Form 8-K, which included a press release dated May 15, 2002, providing information regarding certain organizational changes.
On June 6, 2002, we filed a Current Report on Form 8-K, which included a press release dated May 16, 2002, announcing that Bernard W. Reznicek has joined the Board of Directors.
On June 12, 2002, we filed a Current Report on Form 8-K, announcing the amendment of our Restated Articles of Incorporation to increase the authorized capital from 100,000,000 Common Shares, par value $0.01 per share, to 200,000,000 Common Shares, par value $0.01 per share.
On June 13, 2002, we filed a Current Report on Form 8-K, which included a press release dated June 12, 2002, announcing the completion of a public offering of $300 million principal amount of 7.875% senior notes due 2032, and (2) a notice of our election to redeem all of Del Webb’s outstanding 9% senior subordinated debentures due 2006.
On July 24, 2002, we filed a Current Report on Form 8-K, which included a press release dated June 23, 2002, announcing our earnings for the second quarter ended June 30, 2002.
On August 13, 2002, we filed a Current Report on Form 8-K, which included the sworn statements of Mark J. O’Brien, Chief Executive Officer, and Roger A. Cregg, Chief Financial Officer. The Form 8-K also included a press release dated August 13, 2002, announcing the signing of the sworn statements.
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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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Exhibit Index