UNITED STATESSECURITIES 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 March 31, 2003ORo 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 Parkway, Suite 300Bloomfield 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 ü NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act). YES ü NO
Number of shares of common stock outstanding as of April 30, 2003: 61,084,462
Website Access to Company Reports, Codes and Charters
Pulte’s internet website address is www.pulte.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we electronically file with or furnish them to the Securities and Exchange Commission. Our code of ethics for principal officers and the charters of the Audit, Compensation, and Nominating and Governance committees of our Board of Directors, are also posted on our website.
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, 2002 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 OPERATIONS(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 (continued)(Unaudited)
1. Basis of presentation and significant accounting policies
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1. Basis of presentation and significant accounting policies (continued)
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2. Segment information
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2. Segment information (continued)
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3. Senior notes and subordinated notes
4. Shareholder’s equity
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5. Supplemental Guarantor information ($000’s omitted)
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5. Supplemental Guarantor information (continued)
CONDENSED CONSOLIDATING BALANCE SHEETMARCH 31, 2003($000’s omitted)
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CONDENSED CONSOLIDATING BALANCE SHEETDECEMBER 31, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended March 31, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended March 31, 2002($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended March 31, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended March 31, 2002($000’s omitted)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview:
A summary of our operating results by business segment for the three months ended March 31, 2003 and 2002 are as follows ($000’s omitted, except per share data):
A comparison of pre-tax income (loss) for the three months ended March 31, 2003 and 2002 is as follows:
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Homebuilding Operations:
Our Homebuilding segment consists of the following operations:
Certain operating data relating to our homebuilding operations and Pulte-affiliated joint ventures are as follows ($000’s omitted):
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Homebuilding Operations (continued):
Domestic Homebuilding:
The Domestic Homebuilding operations represent our core business. We conduct our operations in 44 markets, located throughout 25 states, and are presented geographically as follows:
Our greater Phoenix operations accounted for 12% and 11% of Domestic Homebuilding unit net new orders, 10% and 13% of Domestic Homebuilding unit settlements and 9% and 12% of Domestic Homebuilding settlement revenues for the three-month periods ended March 31, 2003 and 2002, respectively. Our operations in Northern California accounted for 12% of Domestic Homebuilding settlement revenues for the three months ended March 31, 2003. No other individual market represented more than 10% of total Domestic Homebuilding unit net new orders, unit settlements or revenues for the three-month periods ended March 31, 2003 or 2002.
The following table presents selected unit information for our Domestic Homebuilding operations:
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Domestic Homebuilding (continued):
Net new orders increased 2% to a record 8,233 units for the three months ended March 31, 2003, from 8,088 in the prior year period. Unit settlements also set a record for the quarter at 5,785 units, an increase of 5% over the same period in 2002. The average selling price for homes closed during the quarter increased to $250,000 in 2003 from $238,000 in 2002. 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. Ending backlog, which represents orders for homes that have not yet closed, grew to 13,053 units. The dollar value of backlog was up 27% to over $3.5 billion.
The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three months ended March 31, 2003 and 2002 ($000’s omitted):
Homebuilding gross profit margins from home settlements increased to 21.0% for the three-month period ended March 31, 2003, compared to 20.1%, in the same period of the prior year. This increase is attributable to continued strong customer demand, positive home pricing and product and geographic mix. Purchase accounting adjustments associated with the merger with Del Webb reduced gross margin for the three months ended March 31, 2002 by approximately $1.7 million, or 10 basis points.
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. Contributions from land sales were relatively flat when compared to the prior year period. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of future land sales. We continue to rationalize certain existing land positions to ensure the most effective use of capital.
For the three months ended March 31, 2003, selling, general and administrative expenses, as a percentage of home settlement revenues, increased 60 basis points to 11.5% when compared to the prior year period. On a comparative basis, excluding purchase accounting, selling, general and administrative expenses, as a percentage of home settlement revenues, increased 80 basis points. This increase is primarily attributed to higher startup costs for new communities and additional expenses incurred in the Northeast and Midwest due to prolonged periods of adverse weather conditions.
Interest expense increased $2.9 million to $11.4 million in the three months ended March 31, 2003 as amounts previously capitalized into inventory are charged to interest expense. Interest capitalized into inventory has increased as a result of higher levels of inventory and indebtedness related to the merger with Del Webb and to support the continued growth of the business.
Equity income for the three months ended March 31, 2003 increased approximately $6.0 million over the prior year period to $6.4 million. The increase was driven by earnings from two Nevada-based joint ventures related to the sale of commercial and residential properties.
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Other income (expense), net totaled expense of $1.6 million and $4.3 million for the three months ended March 31, 2003 and 2002, respectively. The change is primarily due to the write-down of a land development investment and related receivable in 2002.
At March 31, 2003 and 2002, our Domestic Homebuilding operations controlled approximately 189,700 and 138,700 lots, respectively. Approximately 91,500 and 81,400 lots were owned, and approximately 45,900 and 33,400 lots were under option agreements approved for purchase at March 31, 2003 and 2002, respectively. In addition, there were approximately 52,300 and 23,900 lots under option agreements, pending approval, at March 31, 2003 and 2002, respectively.
Domestic Homebuilding inventory at March 31, 2003, was approximately $4.5 billion, of which $3.4 billion related to land and land development. At March 31, 2002, inventory was approximately $3.9 billion, of which $2.9 billion related to land and land development. Other assets included approximately $220.5 million and $240.5 million in land held for disposition at March 31, 2003 and 2002, respectively.
International Homebuilding:
Our International Homebuilding operations are primarily conducted through subsidiaries of International in Mexico, Puerto Rico and Argentina.
Mexico — Effective January 1, 2002, 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, 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 three 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 months ended March 31, 2003 and 2002 ($000’s omitted):
Unit settlements for Pulte and Pulte-affiliated entities were down 25% as increases in Argentina and Puerto Rico were negated by a decline in Mexico. Settlements for Pulte and Pulte affiliated entities in Mexico were 1,107 for the three months ended March 31, 2003 compared to 1,581 in 2002. Activity in Mexico continues to be slowed by the impact of changes made to local lending practices and the lack of alternative funding sources for homebuyers.
Increased revenues in 2003 are due to consolidation of the operations in Mexico for a full three months in 2003 versus two months in 2002 aided by increased closings in Argentina and Puerto Rico. Revenues from our operations in Mexico were $29.4 million and $18.4 million for the three months ended March 31, 2003 and 2002, respectively. Revenues in Argentina increased to $6.7 million from $4.0 million in the prior year period. Our operations in Puerto Rico contributed $7.2 million for the three months ended March 31, 2003. Our consolidated operations in Puerto Rico did not have any closings during the three months ended March 31, 2002 as various factors delayed the opening of replacement communities into the second quarter of 2002.
The decline of sales activity in Mexico caused some inefficiency which had a negative impact on gross margins for International. Gross margins declined to 17.6% in 2003 from 20.3% in 2002. Selling, general and administrative expenses as a percent of revenues declined to 24.1% from 31.3% as a result of a reduction in community start-up costs associated with our operations in Argentina.
Our operations in Argentina recorded transaction losses of $174,000 for the three months ended March 31, 2003, despite a slight recovery by the Argentine peso to U.S. dollar exchange. There were no foreign currency transaction losses recorded in the three months ended March 31, 2002. We also recorded a foreign currency translation gain of $1.6 million, as a component of cumulative other comprehensive income during the three months ended March 31, 2003. It remains unclear at this time how the financial and currency markets in Argentina will be impacted through the remainder of 2003 or how the current economic situation may affect customer home buying attitudes and the homebuilding business in general. At March 31, 2003, our investment in Argentina, net of cumulative foreign currency translation adjustments, approximated $14.3 million. Our operations in Mexico have been affected by a fluctuating dollar to Mexican peso exchange where transaction gains of $207,000 were recorded in the three months ended March 31, 2003 as compared to transaction losses of $488,000 in 2002. Furthermore, we recorded a foreign currency translation loss of $3.8 million, as a component of cumulative other comprehensive income during the three months ended March 31, 2003. At March 31, 2003, our investment in Mexico, net of cumulative foreign currency translation adjustments, approximated $61.1 million.
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Financial Services Operations:
We conduct our financial services operations principally through Pulte Mortgage LLC (Pulte Mortgage), our mortgage banking subsidiary. Pre-tax income of our financial services operations for the three months ended March 31, 2003 and 2002, was $17.1 million and $12.3 million, respectively. This increase was due to higher production volume and favorable interest rates.
The following table presents mortgage origination data for Pulte Mortgage:
Mortgage origination unit and principal volume for the three months ended March 31, 2003, increased 22% and 29%, respectively, over 2002. The growth can be attributed to an increase in the capture rate from 75% to 80% and an increase in the average loan size. Our Domestic Homebuilding customers continue to account for the majority of total loan production, representing 80% of total Pulte Mortgage unit production for 2003, compared with 84% in 2002. Refinancings represented 12% of total loan production in 2003, compared with 7% in 2002. At March 31, 2003, loan application backlog increased 70% to $1.7 billion as compared to $1.0 billion at March 31, 2002.
Our title operations contributed income of $2.1 million for the three months ended March 31, 2003, which was flat as compared to the prior year. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $1.2 million for the three months ended March 31, 2003, compared to $0.8 million in 2002.
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 whose primary purpose is to support the operations of our 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 listed on the New York Stock Exchange. As a result, the corporate segment’s operating results will vary from quarter to quarter as these strategic initiatives evolve.
The following table presents results of operations for this segment for the three months ended March 31, 2003 and 2002 ($000’s omitted):
Pre-tax loss of our corporate business segment increased from the three-month period ended March 31, 2002. The change was due to increases in general corporate expenses consistent with the growth of the business off set in large part by $1.6 million of interest income earned on large cash balances held during the three months ended March 31, 2003.
Corporate net interest expense is net of amounts capitalized into homebuilding inventories. Capitalized interest is amortized to homebuilding interest expense over a period that approximates the average life cycle of our communities. Interest in inventory at March 31, 2003, increased primarily as a result of higher levels of inventory and indebtedness compounded by an increase in the average life cycle. Information related to Corporate interest capitalized into inventory is as follows ($000’s omitted):
Interest incurred for the three months ended March 31, 2003 and 2002, excluding interest incurred by the Company’s financial services operations, was $44.2 million and $39.1 million, respectively.
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Liquidity and Capital Resources:
Our net cash used in operating activities amounted to $146.8 million compared to cash provided by operating activities of $98.4 million in the prior year. This change was primarily driven by an increase in inventories. Net cash used in investing activities of $8.6 million was comparable to last year’s $6.7 million. Net cash provided by financing activities of $22.0 million in 2003 primarily represents proceeds from our $300 million senior notes issued in February 2003 largely offset by the repayment of Pulte Mortgage’s revolving credit facilities and common stock repurchases. Net cash used in financing activities of $102.4 million in 2002 was primarily due to repayments of Pulte Mortgage’s revolving credit facilities.
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 March 31, 2003.
Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various credit arrangements. At March 31, 2003, Pulte Mortgage has committed credit arrangements of $500 million comprised of a $175 million bank revolving credit facility and a $325 million annual asset-backed commercial paper program. This amount is deemed adequate to cover foreseeable needs. During the first quarter of 2003, the $175 million bank revolving credit facility expired and was replaced with a new $175 million revolving credit facility with substantially the same terms expiring in March 2005. There were approximately $343 million of borrowings outstanding under the $500 million Pulte Mortgage arrangements at March 31, 2003. Mortgage loans originated by Pulte Mortgage are subsequently sold to outside investors. We anticipate that there will be adequate mortgage financing available for purchasers of our homes.
In February 2003, we sold $300 million of 6.25% unsecured senior notes, due 2013. The notes were sold in anticipation of retiring certain other debt coming due and callable in 2003. Subsequently, in March 2003, under the terms of Del Webb’s $200 million 9.375% senior subordinated notes due 2009, we exercised our optional right to redeem the remaining outstanding principal balance of approximately $155 million. The notes will be redeemed in May 2003 at a price equal to 104.688% of the principal amount. Furthermore, our $175 million 9.5% senior notes matured and were retired on April 1, 2003.
Pursuant to our $100 million share repurchase program, we repurchased 395,400 common shares at an aggregate cost of approximately $18.2 million during the first quarter 2003. At March 31, 2003, we had remaining authorization to purchase common stock aggregating $77.5 million.
We anticipate that our effective tax rate for 2003 will approximate 38%, a decrease from the 2002 effective tax rate of 39%. Our income tax liability and related effective tax rate are affected by a number of factors. The reduction in the effective tax rate for 2003 is principally due to a lower expected effective state income tax rate for 2003 and anticipated shareholder approval of the Company’s Senior Management Annual Incentive Plan, which will allow for tax deductibility of Plan payments under section 162(m) of the Internal Revenue Service Code.
At March 31, 2003, we had cash and equivalents of $479.6 million and $2.2 billion of senior notes and senior subordinated notes. Other financing included limited recourse collateralized financing totaling $126.2 million. Sources of our working capital at March 31, 2003, include our cash and equivalents, our $570 million committed unsecured revolving credit facility and Pulte Mortgage’s $500 million revolving credit facilities. Our debt-to-total capitalization, excluding our collateralized debt, was approximately 44% at March 31, 2003, and approximately 38% net of cash and equivalents. We expect to maintain our net debt-to-total capitalization at or below the 40% level. It is our intent to exercise, over time, the early call provision 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 financing sources, including securities offerings. At March 31, 2003, we had $400 million remaining under our current mixed securities shelf registration.
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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Critical Accounting Policies and Estimates:
There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2003 compared to those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2002, except for the following:
Stock-based compensation:
We currently have several stock-based employee compensation plans. Effective January 1, 2003 we adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting for Stock Issued to Employees.” We selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the prospective method, we will recognize compensation expense based on the fair value provisions of SFAS No. 123 for all new stock option grants effective January 1, 2003. Grants made prior to January 1, 2003 will continue to be accounted for under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. With the exception of certain variable stock option grants, no stock-based employee compensation cost is reflected in net income for grants made prior to January 1, 2003, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
We use the Black-Scholes option-pricing model to determine the fair value of each option grant. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, risk-free interest rates and expected lives. These assumptions reflect management’s best estimates, but these items involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been materially impacted. Furthermore, if management uses different assumptions in future periods, stock-based compensation expense could be materially impacted in future periods.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Quantitative disclosure:
We are subject to interest rate risk on our rate-sensitive financing to the extent long-term rates decline. The following table sets forth, as of March 31, 2003, our rate-sensitive financing obligations, principal cash flows by scheduled maturity, weighted-average interest rates and estimated fair market values ($000’s omitted).
Qualitative disclosure:
This information can be found in Item 7A., Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2002, and is incorporated herein by reference.
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Special Notes Concerning 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 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.
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 Company’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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number and Description
(b) Report on Form 8-K
On March 17, 2003, we filed a Current Report on Form 8-K, which included a press release dated the same day, announcing our election to expense stock options in financial statements effective January 1, 2003. The release also discussed several enhancements to our corporate governance policies.
On March 28, 2003, we filed a Current Report on Form 8-K, which included a press release dated March 27, 2003, announcing that Del Webb Corporation had given notice of its election to redeem all of Del Webb’s outstanding 9.375% senior subordinated debentures due 2009, with an original principal amount of $200 million.
On April 24, 2003, we filed a Current Report on Form 8-K, which included a press release dated the same day, announcing our earnings for the three months ended March 31, 2003.
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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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Exhibit Index
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