SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2002OR( ) 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 October 31, 2002: 61,206,065
Total pages: 35
Listing of exhibits: 32
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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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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
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PULTE HOMES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
CONSOLIDATING BALANCE SHEETDECEMBER 31, 2001($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended September 30, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the nine months ended September 30, 2002($000’s omitted)
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5. Supplemental guarantor information (continued)
CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended September 30, 2001($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the nine months ended September 30, 2001($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the nine months ended September 30, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the nine months ended September 30, 2001($000’s omitted)
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview:
During the three and nine months ended September 30, 2002, we achieved record financial results. Much of our success can be attributed to our merger with Del Webb Corporation, which contributed a full three and nine months in 2002 compared to the two months contributed to both periods in 2001. A summary of our operating results by business segment for the three and nine-month periods ended September 30, 2002 and 2001 is as follows ($000’s omitted):
A comparison of pre-tax income (loss) for the three and nine-month periods ended September 30, 2002 and 2001 is as follows:
During the three-month period ended September 30, 2002, we recorded an after-tax gain of approximately $10 million in discontinued operations. The gain related to the recognition of income tax benefits resulting from the favorable resolution of certain tax matters associated with the thrift operations we discontinued in 1994.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Homebuilding Operations:
The Company’s Homebuilding segment consists of the following operations:
Certain operating data relating to our homebuilding operations and Pulte-affiliated joint ventures for the three and nine months ended September 30, 2002 and 2001, are as follows ($000’s omitted):
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Homebuilding Operations (continued):
Domestic Homebuilding:
The Domestic Homebuilding operations represent our core business. Operations are conducted in 43 markets, located throughout 25 states, and are presented geographically as follows:
For the three and nine-month periods ended September 30, 2002, our greater Phoenix market operations accounted for 10% of Domestic Homebuilding settlement revenues, 11% of settlement units and 11% of net new orders. For the three-month period ended September 30, 2001, these operations accounted for 10% of Domestic Homebuilding settlement revenues, 11% of settlement units and 10% of net new orders. No other individual market represented more than 10% of total Domestic Homebuilding settlement revenues, settlement units or unit net new orders for the three and nine-month periods ended September 30, 2002 or 2001.
The following table presents selected unit information for our Domestic Homebuilding operations by geographic group:
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Domestic Homebuilding (continued):
The following selected unit information for our traditional Pulte domestic homebuilding operations and the Del Webb homebuilding operations has been presented for comparative purposes. The merger with Del Webb was effective July 31, 2001, therefore, results for three and nine months ended September 30, 2001 of Del Webb only include two months of operations.
Unit settlements increased 16% and 33% for the three and nine months ended September 30, 2002, respectively. Excluding Del Webb, unit settlements increased 10% and 8% for the three and nine-month periods. Net new orders increased 48% and 43%, excluding the Del Webb acquired backlog of 3,823 units, for the three and nine-month periods ended September 30, 2002, respectively. Excluding both the acquired backlog and net new orders of Del Webb, net new orders increased 34% and 15%, respectively. Ending backlog at September 30, 2002, which represents orders for homes that have not yet closed, grew to 13,675 units valued at over $3.5 billion.
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The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three and nine months ended September 30, 2002 and 2001 ($000’s omitted):
Continued strong consumer demand for new construction, the addition and expansion of the Del Webb operations, combined with our ability to effectively manage selling pace and price of a broad product line, drove increases in home sale revenue, gross margin and pre-tax income for the three and nine months ended September 30, 2002 when compared to the prior year periods.
The average selling price for homes closed increased 5% to $241,000 for the three months ended September 30, 2002, and 8% to $239,000 for the nine months then ended. The increase benefited from Del Webb product offerings, which averaged between $255,000 and $265,000 over the past year. Excluding Del Webb, the average selling price increased 5% for the three and nine months ended September 30, 2002.
Gross profit margins were 20.2% and 20.0%, respectively, for the three and nine-month periods ended September 30, 2002, compared to 19.9% and 20.0%, respectively, for the same periods in the prior year. Purchase accounting adjustments associated with the merger reduced gross margin by approximately $0.3 million and $3.2 million, respectively, for the three and nine-month periods ended September 30, 2002, compared to $9.4 million for both prior year periods. Excluding purchase accounting adjustments, gross margins would have been 20.2% and 20.3% compared to 20.5% and 20.2% in the prior year periods. The change from prior year periods can be attributed to a gradual shift in market and product mix resulting in increased unit volume at lower margins.
As a percent of home settlement revenue, selling, general and administrative expenses were flat for the three months and increased 30 basis points for the nine months ended September 30, 2002. Excluding purchase accounting adjustments from both years, selling, general and administrative expenses as a percent of home settlement revenue were up 30 and 20 basis points, respectively, over the prior year three and nine-month periods, reflecting a full period of Del Webb expenses in 2002.
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Interest expense increased $4.1 million and $9.8 million, respectively, over the prior three and nine-month periods ended September 30, as a result of an increase in debt levels to support the growth of the business.
The change in other income (expense), net for nine months ended September 30, 2002 is primarily related to higher purchase accounting adjustments in 2002 and income from a land development joint venture and an insurance settlement recognized in 2001 partially offset by the non-amortization of goodwill in 2002.
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 and profitability of land sales. We continue to evaluate existing land positions to ensure the most effective use of invested capital.
Our Domestic Homebuilding operations controlled approximately 118,500 lots at September 30, 2002, of which approximately 84,400 lots were owned and approximately 34,100 lots were controlled through option agreements that had been approved for purchase. At September 30, 2001, we controlled approximately 120,400 lots, of which approximately 87,700 lots were owned, and approximately 32,700 lots were controlled through option agreements. In addition, there were approximately 39,900 lots under option at September 30, 2002, pending approval, that are under review and evaluation for future use by our Domestic Homebuilding operations. This compared to 26,500 lots at September 30, 2001.
Domestic Homebuilding inventory at September 30, 2002 was approximately $4.2 billion, of which $3.1 billion was related to land and land development. At September 30, 2001, Domestic Homebuilding inventory approximated $3.9 billion, of which $2.9 billion was related to land and land development.
Included in other assets is $247 million in land held for disposition as of September 30, 2002, as compared to $274 million in the prior year.
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 S. de R.L. de C.V. (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, the Company owns 63.8% of Pulte Mexico and has 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 nine months ended September 30, 2002 and 2001 ($000’s omitted):
Increased revenues in 2002 are due to the consolidation of the operations in Mexico for eight months of 2002 and a full period of the operations in Argentina, which had only begun recognizing its first closings in June of 2001. Revenues from our operations in Mexico were $44.9 million and $107.1 million for the three and nine-month periods ended September 30, 2002, respectively. Our operations in Argentina contributed $3.6 million and $13.8 million, respectively. The increases in cost of sales and selling, general and administrative expense are a result of the consolidation of our operations in Mexico partially offset by a decline in start-up costs associated with our operations in Argentina. Equity in income of joint ventures in 2002 represents one month of the joint venture operations in Mexico and our joint venture located in San Juan, Puerto Rico, which had its first closings during the third quarter of 2001.
Our operations in Argentina recorded a $102,000 transaction loss for the nine months ended September 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 $14.0 million, as a component of other comprehensive income during the first nine months of 2002. It remains unclear at this time how the financial and currency markets in Argentina 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. At September 30, 2002, our remaining investment, net of foreign currency translation adjustments, in Argentina approximated $10.8 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 nine-month periods ended September 30, 2002, was $19.2 million and $47.6 million, respectively, compared to $9.3 million and $23.5, 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 nine-month periods ended September 30, 2002, increased 23% and 29%, respectively, from the comparable 2001 periods due in large part to an increase in capture rate and the inclusion of Del Webb volume. Del Webb contributed $157 million and $454 million, respectively, of the total mortgage origination principal volume for the three and nine-month periods ended September 30, 2002 compared to $95 million in both prior year periods. Refinancings accounted for approximately 8% of total originations for the three months ended September 30, 2002, compared to 6% in the prior year. For the nine months ended September 30, refinancings represented 6% of total originations in 2002 compared to 10% in 2001. Adjustable rate mortgages (ARMs) represented 14% of total originations for the three months ended September 30, 2002, compared to 3% in the prior year. ARMs represented 12% and 2% of total originations for the nine months ended September 30, 2002 and 2001, respectively. Our Domestic Homebuilding customers continue to account for the majority of total loan production, representing 84% and 85%, respectively, of total PMC volume for the three and nine-month periods ended September 30, 2002, compared to 82% and 78%, respectively, in the prior year. At September 30, 2002, loan backlog, which represents loan originations in process that have not yet closed, increased 44% to $1.3 billion as compared with $876 million at September 30, 2001.
Income from our title operations increased to $3.1 million for the three months ended September 30, 2002, from $2.3 million in 2001, and to $8.0 million for the nine months ended, from $5.3 million in 2001. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $0.9 million for the three months ended September 30, 2002, compared to a loss of $0.3 million in 2001, and $2.8 million for the nine months ended September 30, 2002 compared to $1.7 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.
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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.
The following table presents Corporate results of operations for the three and nine months ended September 30, 2002 and 2001 ($000’s omitted):
The change in other corporate expenses, net for both the three and nine months ended September 30, 2002 can be primarily attributed to income recognized from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale, partially offset by stock compensation expense.
Interest expense for the three months ended September 30, 2002 was relatively consistent with the 2001 period. Interest expense for the nine months increased by approximately $4.9 million as a result of an increase in debt levels to support the growth of the business. Interest incurred for the three and nine-month periods ended September 30, 2002 and 2001, excluding interest incurred by our financial services operations, was approximately $40.1 and $119.3 million and $37.5 and $73.0 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):
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Liquidity and Capital Resources:
Net cash provided by operating activities increased to $94.3 million from a use of cash of $418.9 million in the prior year. An increase in net income, a smaller use of cash to build 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 $287.8 million in 2001 to $41.2 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 facility at September 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, on August 23, 2002, was increased to $500 million, an amount deemed adequate to cover foreseeable needs. There were approximately $302 million of borrowings outstanding under the $500 million PMC arrangement at September 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%.
On April 23, 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, redeem and repurchase approximately $99 million of Del Webb’s senior subordinated notes and to repay short-term borrowings under our revolving bank credit arrangements. We expect to continue to exercise the early call provisions of these higher-rate senior subordinated notes, the next of which will be May 2003.
At September 30, 2002, we had cash and equivalents of $212.1 million and total long-term indebtedness of $1.9 billion. Sources of our working capital at September 30, 2002, include cash and equivalents, our $570 million committed unsecured revolving credit facility, PMC’s $500 million revolving credit facilities and $700 million available under our current shelf registration. Our debt-to-total capitalization, excluding our non-guarantor asset secured borrowings, was approximately 42.5% as of September 30, 2002, and approximately 39.7% net of cash and equivalents. We expect to maintain our net debt-to-total capitalization at the 40% level through the end of the year. 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.
On October 11, 2002, our operating entity in Argentina entered into a $3 million revolving credit facility in order to provide an additional financial resource to support the operations. The credit facility has been guaranteed by Pulte Homes, Inc.
On October 22, 2002, the Company’s Board of Directors approved a stock repurchase plan of up to $100 million. Shares will be purchased from time-to-time on the open market, depending on market conditions.
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Liquidity and Capital Resources (continued):
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.
Safe Harbor Statement
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 forward-looking statements involve known risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (1) general economic and business conditions; (2) interest rate changes and the availability of mortgage financing; (3) the relative stability of debt and equity markets; (4) competition; (5) the availability and cost of land and other raw materials used by the Company in its homebuilding operations; (6) the availability and cost of insurance covering risks associated with our business; (7) shortages and the cost of labor; (8) weather related slowdowns; (9) slow growth initiatives and/or local building moratoria; (10) governmental regulation, including the interpretation of tax, labor and environmental laws; (11) changes in consumer confidence and preferences; (12) required accounting changes; (13) terrorist acts and other acts of war; and (14) other factors over which the Company has little or no control.
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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 September 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.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report, management, including the Company’s President & Chief Executive Officer and Senior Vice President & Chief Financial Officer, evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based upon, and as of the date of that evaluation, the President & Chief Executive Officer and Senior Vice President & Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
There have been no significant changes in the Company’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Report on Form 8-K
On October 23, 2002, we filed a Current Report on Form 8-K, which included a press release dated October 22, 2002, announcing our earnings for the third quarter ended September 30, 2002. The Form 8-K also included a press release dated October 22, 2002, announcing the Board of Directors approval of a $100 million stock repurchase program.
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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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CERTIFICATIONS
I, Mark J. O’Brien, certify that:
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CERTIFICATIONS (continued)
I, Roger A. Cregg, certify that:
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10-Q EXHIBIT INDEX