UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-9804
PULTE HOMES, INC.
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 (X) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act). YES (X) NO ( )
Number of shares of common stock outstanding as of July 31, 2004: 126,918,434
Website Access to Company Reports, Codes and Charters
Our 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, our corporate governance guidelines and the charters of the Audit, Compensation, and Nominating and Governance Committees of our Board of Directors are also posted on our website and are available in print upon request.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Note: The condensed consolidated balance sheet at December 31, 2003 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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The consolidated financial statements include the accounts of Pulte Homes, Inc. and all of its direct and indirect subsidiaries (the “Company”). The direct subsidiaries of Pulte Homes, Inc. include Pulte Diversified Companies, Inc., Del Webb Corporation (“Del Webb”) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s operating subsidiaries include Pulte Home Corporation, Pulte International Corporation (International) and other subsidiaries that are engaged in the homebuilding business. Pulte Diversified Companies, Inc.’s non-operating thrift subsidiary, First Heights Bank, fsb (“First Heights”), is classified as a discontinued operation. The Company also has a mortgage banking company, Pulte Mortgage LLC (“Pulte Mortgage”), which is a subsidiary of Pulte Home Corporation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the Company’s consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.
Certain amounts previously reported in the 2003 financial statements and notes thereto were reclassified to conform to the 2004 presentation. In addition, all share and per share amounts have been restated to reflect the Company’s two-for-one stock split effected January 2, 2004.
Allowance for warranties
Home purchasers are provided with warranties against certain building defects. The specific terms and conditions of those warranties vary geographically. Most warranties cover different aspects of the home’s construction and operating systems for a period of up to ten years. The Company estimates the costs to be incurred under these warranties and records a liability for the amount of such costs at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes to the Company’s allowance for warranties are as follows ($000’s omitted):
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PULTE HOMES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)(Unaudited)
Stock-based compensation
The Company currently has several stock-based employee compensation plans. Effective January 1, 2003, the Company adopted the preferable fair value recognition provisions of SFAS No. 123, “Accounting for Stock Issued to Employees.” The Company selected the prospective method of adoption as permitted by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Under the prospective method, the Company 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 in those years had an exercise price equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding stock options in each period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.
The Company also recorded compensation expense for restricted stock awards, net of related tax effects, of $1.0 million and $2.1 million for the three and six months ended June 30, 2004, compared with $1.3 million and $2.5 million for the three and six months ended June 30, 2003. These amounts have been excluded from the reconciliation above as they would have no impact on pro forma net income as presented.
Land, not owned, under option agreements
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended by FIN 46-R issued in December 2003 (collectively referred to as “FIN 46”). Until this interpretation was issued, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the expected losses from the variable interest entity’s activities or is entitled to receive a majority of the entity’s expected residual returns. FIN 46 applied immediately to all variable interest entities created after January 31, 2003 and was effective in the first interim period ending after December 31, 2003 for variable interest entities created prior to February 1, 2003.
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In the ordinary course of business, the Company enters into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, the Company will provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Under FIN 46, if the entity holding the land under option is a variable interest entity, the Company’s deposit represents a variable interest in that entity.
In applying the provisions of FIN 46, the Company evaluated all land option agreements (including those created prior to February 1, 2003) and determined that the Company was subject to a majority of the expected losses or entitled to receive a majority of the expected residual returns under a limited number of these agreements. As the primary beneficiary under these agreements, the Company is required to consolidate variable interest entities at fair value. At June 30, 2004 and December 31, 2003, the Company classified $124.6 and $73.3 million, respectively, as land, not owned, under option agreements on the balance sheet, representing the fair value of land under contract, including deposits. The corresponding liability has been classified within accounts payable, accrued and other liabilities on the balance sheet. The adoption of FIN 46 had no impact on the Company’s results of operations or cash flows.
New accounting pronouncements
In March 2004, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 105 (“SAB 105”), Application of Accounting Principles to Loan Commitments. SAB 105 provides the SEC staff position regarding the application of accounting principles generally accepted in the United States to loan commitments that relate to the origination of mortgage loans held for resale. SAB 105 contains specific guidance on the inputs to a valuation-recognition model to measure loan commitments accounted for at fair value. Current accounting guidance requires the commitment to be recognized on the balance sheet at fair value from its inception through its expiration or funding. SAB 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. In addition, SAB 105 requires the disclosure of both the accounting policy for loan commitments including the methods and assumptions used to estimate the fair value of loan commitments and any associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The issuance of SAB 105 had an insignificant impact on our results of operations, financial condition and cash flows.
We have two reportable business segments, Homebuilding and Financial Services, and one non-operating segment, Corporate.
The Homebuilding segment consists of the following operations:
The Financial Services segment consists principally of mortgage banking and title insurance operations conducted through Pulte Mortgage and other subsidiaries.
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Corporate is a non-operating segment that 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 listed on the New York Stock Exchange.
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Major components of the Company’s inventory were as follows ($000’s omitted):
The Company’s investments in unconsolidated entities totaled $205.4 million at June 30, 2004 and $69.4 million at December 31, 2003. All of these investments are accounted for under the equity method.
During the second quarter of 2004, the Company invested approximately $77.5 million in two joint ventures. These joint ventures develop and/or sell land within the United States. The Company has not guaranteed the indebtedness of the joint ventures.
During January 2004, the Company invested $35.0 million for a 50% ownership interest in an entity that supplies and installs basic building components and operating systems, with an option to purchase the remaining 50% interest in the entity in July 2006 or earlier under certain circumstances. The Company has certain commitments to the entity under operating and supply agreements, including: funding additional working capital, as determined by the entity’s operating committee on which the Company has 50% representation; and utilization of products and services of this entity for new homes built within certain markets in the western United States. This entity currently has no outstanding indebtedness.
For the six months ended June 30, 2004, we made additional capital contributions to our investments in unconsolidated entities totaling approximately $29.8 million and received cash distributions from these entities totaling approximately $29.8 million.
Subsequent to June 30, 2004, the Company sold $400 million of 4.875% senior notes, which mature on July 15, 2009 and are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of our other unsecured and unsubordinated indebtedness. Proceeds from this offering will be used for the repayment of expiring notes due on August 15, 2004 of approximately $112 million, the reduction of short-term borrowings under our unsecured revolving credit facility and for general corporate purposes.
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In January 2004, the Company sold $500 million of 5.25% unsecured senior notes, which mature on January 15, 2014 and are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of our other unsecured and unsubordinated indebtedness. Proceeds from the sale were used to retire the $77 million outstanding Del Webb 10.25% senior subordinated notes and for general corporate purposes, including continued investment in our business.
In December 2003, under the terms of Del Webb’s $150 million 10.25% senior subordinated notes due 2010, the Company exercised its optional right to call for the redemption of the remaining outstanding principal balance of approximately $77 million. The notes were redeemed in February 2004 at a price equal to 105.125% of the principal amount.
On December 11, 2003 the Company announced a two-for-one stock split effected in the form of a 100 percent stock dividend. The distribution was made on January 2, 2004. All share and per share amounts have been restated to retroactively reflect the stock split.
In October 2002, the Company’s Board of Directors authorized the repurchase of $100 million of Pulte Homes, Inc. common stock in open-market transactions or otherwise. As of June 30, 2004, we have repurchased a total of 990,000 shares for a total of $22.5 million. No repurchases occurred during the six months ended June 30, 2004.
Accumulated other comprehensive income (loss)
The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):
At June 30, 2004, Pulte Homes, Inc. had the following outstanding senior note obligations: (1) $112 million, 8.375%, due 2004, (2) $125 million, 7.3%, due 2005, (3) $200 million, 8.125%, due 2011, (4) $499 million, 7.875%, due 2011, (5) $300 million, 6.25%, due 2013, (6) $500 million, 5.25%, due 2014, (7) $150 million, 7.625%, due 2017, (8) $300 million, 7.875%, due 2032, and (9) $400 million, 6.375%, due 2033. Such obligations to pay principal, premium, if any, and interest are guaranteed jointly and severally on a senior basis by Pulte Homes, Inc.’s 100%-owned Domestic Homebuilding subsidiaries (collectively, the Guarantors). Such guarantees are full and unconditional.
Supplemental consolidating financial information of the Company, specifically including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting. Separate financial statements of the Guarantors are not provided as the consolidating financial information contained herein provides a more meaningful disclosure to allow investors to determine the nature of the assets held by and the operations of the combined groups.
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CONDENSED CONSOLIDATING BALANCE SHEETJune 30, 2004($000’s omitted)
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CONDENSED CONSOLIDATING BALANCE SHEETDecember 31, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended June 30, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the six months ended June 30, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended June 30, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the six months ended June 30, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the six months ended June 30, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWS (continued)For the six months ended June 30, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the six months ended June 30, 2003($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWS (continued)For the six months ended June 30, 2003($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-month and six-month periods ended June 30, 2004 and 2003 is as follows ($000’s omitted):
Key financial highlights for the three-month and six-month periods ended June 30, 2004 and 2003 are as follows:
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Homebuilding Operations:
Our Homebuilding segment consists of the following operations:
Certain operating data relating to our homebuilding operations are as follows ($000’s omitted):
Domestic Homebuilding
The Domestic Homebuilding business unit represents our core business. Our operations are conducted in 44 markets located throughout 27 states, presented geographically as follows:
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The following table presents selected unit information for our Domestic Homebuilding operations:
Continued strong demand for new homes, particularly in the West, was the primary driver for increases in net new orders, unit settlements and unit backlog.
Net new orders increased 17%, to a record 10,776 units, for the three months ended June 30, 2004. Net new orders for the six months ended June 30, 2004 increased 24% to 21,527 units.
Unit settlements also set a record for the three and six-month periods at 8,480 units and 15,519 units, respectively, representing increases of 19% and 20%, respectively, over the same periods in 2003. The average selling price for homes closed increased 9% to $282,000 for the three months ended June 30, 2004, and 9% to $279,000 for the six months then ended. Changes in average unit selling price reflect a number of factors, including changes in market selling prices, primarily in the West, and geographic and product mix.
Unit backlog increased as of June 30, 2004 compared with the prior year. Ending backlog, which represents orders for homes that have not yet closed, grew to a record 19,960 units. The dollar value of our backlog was up 48% to $6.3 billion at June 30, 2004 compared with $4.2 billion at June 30, 2003. Our most significant increases occurred in the Southeast, Central and West, which had increases of 25%, 40% and 53%, respectively.
The West contributed a significant portion of the activity in the Domestic Homebuilding business unit, representing 41.2% of unit net new orders and 39.5% of unit settlements for the three months ended June 30, 2004 and 40.2% of unit net new orders and 41.4% of unit settlements for the six months ended June 30, 2004 and 41.9% of the total Domestic Homebuilding backlog at June 30, 2004.
For 2004, the greater Phoenix market represented 17.9% of Domestic Homebuilding unit net new orders, 15.6% of unit settlements and 13.1% of Domestic Homebuilding settlement revenues for the three months ended June 30. The Las Vegas market represented 10.2% of unit settlements and 13.3% of Domestic Homebuilding settlement revenues for the three months ended June 30. The greater Phoenix market represented 16.2% of Domestic Homebuilding unit net new orders, 16.1% of unit settlements and 13.2% of Domestic Homebuilding
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settlement revenues for the six months ended June 30. The Las Vegas market represented 10.7% of unit settlements and 13.9% of settlement revenues for the same period.
For 2003, the greater Phoenix market represented 12.0% of unit net new orders, 11.9% of unit settlements and 10.6% of Domestic Homebuilding settlement revenues for the three-month period ended June 30. For the six-month period of 2003, our metropolitan Phoenix operations represented 12.1% of unit new net orders and 11.1% of unit settlements.
No other individual market represented more than 10.0% of total Domestic Homebuilding unit net new orders, unit settlements or revenues for the three and six-month periods ended June 30, 2004 or 2003.
The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three and six months ended June 30, 2004 and 2003 ($000’s omitted):
Homebuilding gross profit margins from home settlements increased to 22.1% and 22.0% for the three and six months ended June 30, 2004, compared with 20.8% and 20.5%, respectively, for the same periods in the prior year. This increase is primarily attributable to favorable home pricing and product and geographic mix.
We consider land acquisition one of our core competencies. We acquire land primarily for the construction of our homes for sale to homebuyers. We will often sell select parcels of land within or adjacent to our communities to retail and commercial establishments. We also will, on occasion, sell lots within our communities to other homebuilders. Contributions from land sales for the quarter increased 49% to $13.6 million when compared with the prior year period. Revenues and their related gains/losses may vary significantly between periods, depending on the timing of land sales. We continue to evaluate our existing land positions to ensure the most effective use of capital.
Selling, general and administrative expenses as a percentage of home settlement revenues declined by approximately 100 basis points to 9.3% for the three months ended and 90 basis points to 9.9% for the six months ended June 30, 2004. This improvement can be attributed to greater leverage as a result of volume increases and the favorable pricing environment for our homes, combined with a reduced level of additional weather-related community start-up expenses during 2004 as compared with expenses incurred during the first quarter of 2003 in the Northeast and Midwest.
The increase in equity income for both periods was attributable to our 50% investment in the joint venture that supplies and installs basic building components and operating systems.
Other income (expense), net, which includes several miscellaneous items, increased for the three and six-month periods, primarily as a result of insurance-related expenses and settlements.
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At June 30, 2004 and December 31, 2003, our Domestic Homebuilding operations controlled approximately 312,700 and 256,900 lots, respectively. Approximately 135,200 and 120,400 lots were owned, and approximately 97,900 and 66,000 lots were under option agreements approved for purchase at June 30, 2004 and December 31, 2003, respectively. In addition, there were approximately 79,600 and 70,500 lots under option agreements, pending approval, at June 30, 2004 and December 31, 2003, respectively.
The total purchase price applicable to land under option approved for use by our homebuilding operations at future dates approximated $3.7 billion at June 30, 2004, compared with $2.6 billion at December 31, 2003. In addition, total purchase price applicable to land under option pending approval was valued at $2.8 billion at June 30, 2004 compared with $2.1 billion at December 31, 2003. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by cash deposits totaling $160.1 million, which are generally non-refundable.
International Homebuilding:
Our International Homebuilding operations are primarily conducted through subsidiaries of International in Mexico, Puerto Rico and Argentina. We continue to evaluate various long-term strategic alternatives with regard to our International operations.
The following table presents selected financial data for our International Homebuilding operations for the three and six months ended June 30, 2004 and 2003 ($000’s omitted):
Note: Homebuilding unit settlements of affiliates, not included in the table above, for the three months ended June 30, 2004 and 2003 were 78 and 37, respectively. For the six months ended June 30, 2004 and 2003, homebuilding units of affiliates, not included in the table above, were 114 and 85, respectively.
International unit settlements for the three and six months ended June 30, 2004, increased 6% and 19% respectively. The increase in unit settlements is attributable to our operations in Mexico, where unit settlements increased to 1,519 from 1,403 for the three months ended June 30, 2004 and to 3,051 from 2,510 for the six months ended June 30, 2004. International revenues for the three and six months ended June 30, 2004 decreased 10% and 1%, respectively, over the prior year periods. The decrease in International revenues is the result of a shift in product mix to the lower priced units in Mexico from the higher priced units in Argentina.
Product mix shifts also had a negative impact on gross margins. Gross margins decreased approximately 230 basis points to 19.4% for the three months ended June 30, 2004 and 70 basis points to 19.1% for the six months ended June 30, 2004. Selling, general and administrative expenses as a percent of revenues declined to 20.1% from 20.7% for the three-month period and to 18.8% from 22.3% for the six-month period as Mexico began to see the benefits of restructuring actions taken during 2003.
At June 30, 2004, our investments in Puerto Rico approximated $33.1 million. Our operations in Argentina and Mexico are affected by fluctuations in currency rates for those countries. Transaction gains and losses for the three and six months ended June 30, 2004 and 2003, included in other income (expense), net, were not significant. At June 30, 2004, our investments in Argentina and Mexico, net of accumulated foreign currency translation adjustments, approximated $12.2 million and $67.4 million, respectively.
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Financial Services Operations:
We conduct our financial services business, which includes mortgage and title insurance operations, through Pulte Mortgage and other subsidiaries.
The following table presents mortgage origination data for our Financial Services operations:
Pre-tax income of our financial services operations for the three and six months ended June 30, 2004 was $8.4 and $18.5 million, respectively, compared with $20.9 and $38.0 million for the prior year periods. The decrease in pre-tax income can be attributed to a shift in our product mix to ARMs, which generally have a lower profit per loan than fixed rate products. The shift in product mix is attributable to customer mortgage product preference.
ARMs represented 42.2% of total funded origination dollars and 40.3% of total funded origination units for the three months ended June 30, 2004, compared with 18.3% and 17.1%, respectively, in the prior year three-month period. ARMs represented 37.1% of total funded origination dollars and 35.3% of total funded origination units for the six months ended June 30, 2004, compared with 17.5% and 16.1%, respectively, in the prior year six-month period. Refinancings approximated 3.4% and 3.7% of total unit originations for the three and six-month periods ended June 30, 2004, compared with 11.3% for both prior year periods.
Mortgage origination unit and principal volume for the three months ended June 30, 2004 increased 17% and 29%, respectively, and 18% and 31% for the six-month period, respectively. The growth is attributable to an increase in the capture rate from 83.2% to 88.4% for the three-month period and 82.0% to 87.4% for the six-month period combined with the volume increases experienced in our homebuilding business and an increase in the average loan size. Our Domestic Homebuilding customers continue to represent the majority of total loan production, representing 88.4% and 88.6% of total Pulte Mortgage unit production for the three and six months ended June 30, 2004, respectively, compared with 79.3% and 79.8%, respectively, for the same periods in the prior year.
At June 30, 2004, loan application backlog increased to $3.8 billion as compared with $2.4 billion at June 30, 2003.
Income from our title insurance operations increased to $3.5 million for the three months ended June 30, 2004, from $3.0 million in 2003, and to $6.8 million for the six months ended, from $5.1 million in 2003. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of $0.2 million for the three months ended June 30, 2004, compared with $1.1 million in 2003, and $1.0 million for the six months ended June 30, 2004 compared with $2.3 million in 2003.
We hedge portions of our forecasted cash flow from sales of closed mortgage loans with derivative financial instruments to minimize the impact of changes in interest rates. We do not use derivative financial instruments for trading purposes.
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Corporate:
Corporate is a non-operating segment that 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 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 and six months ended June 30, 2004 and 2003 ($000’s omitted):
Interest expense, net of interest capitalized into inventory, increased $2.6 and $5.3 million in the three and six months ended June 30, 2004. This is a result of the continued increase in debt levels necessary to support our growth. Interest incurred for the three and six months ended June 30, 2004, excluding interest incurred by our Financial Services operations, was approximately $50.4 and $99.2 million, respectively.
The changes in other corporate expenses, net for the three and six months ended June 30, 2004 resulted from increased charitable contributions expense, offset by decreased compensation-related expense, compared with the prior year. Additionally, during the second quarter of 2003, we recognized income from the sale and adjustment to fair value of various non-operating parcels of commercial land held for sale.
Interest capitalized into inventory is charged to home cost of sales based on the cyclical timing of our unit settlements over a period that approximates the average life cycle of our communities. Interest in inventory has increased primarily as a result of higher levels of indebtedness to support the growth of the business and the addition of the Del Webb properties, which have a longer life cycle. Information related to Corporate interest capitalized into inventory is as follows ($000’s omitted):
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Liquidity and Capital Resources:
Our net cash used in operating activities amounted to $489.6 million compared with net cash used in operating activities of $323.9 million in the prior year period. This change was primarily driven by an increase in inventories. Cash used in investing activities was $145.4 million for the six months ended June 30, 2004, compared with $11.9 million in the prior year. The change in net cash used in investing activities can be attributed to additional investments in unconsolidated entities. Net cash provided by financing activities of $320.3 million for the six months ended June 30, 2004 primarily represents proceeds from our $500 million senior notes issued in January 2004 and borrowings of $127.0 million under the unsecured revolving credit facility during the second quarter of 2004, largely offset by the repayment of Pulte Mortgage’s revolving credit facilities and redemption of the remaining Del Webb 10.25% senior subordinated notes.
We finance our homebuilding land acquisitions, development and construction activities from internally generated funds and existing credit agreements. We had outstanding borrowings of $127.0 million under our $850 million unsecured revolving credit facility at June 30, 2004.
Pulte Mortgage provides mortgage financing for many of our home sales and uses its own funds and borrowings made available pursuant to various committed and uncommitted credit arrangements. At June 30, 2004, Pulte Mortgage had committed credit arrangements of $905 million comprised of a $355 million bank revolving credit facility and a $550 million annual asset-backed commercial paper program. Subsequent to June 30, 2004, we expanded the capacity on the bank revolving credit facility from $355 million to $390 million. There were approximately $290.2 million of borrowings outstanding under existing Pulte Mortgage arrangements at June 30, 2004. 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.
Subsequent to June 30, 2004, we sold $400 million of 4.875% senior notes, which mature on July 15, 2009 and are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of our other unsecured and unsubordinated indebtedness. Proceeds from this offering will be used for the repayment of expiring notes due on August 15, 2004 of approximately $112 million, the reduction of short-term borrowings under our unsecured revolving credit facility and for general corporate purposes.
In January 2004, we sold $500 million of 5.25% unsecured senior notes, which mature on January 15, 2014 and are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of our other unsecured and unsubordinated indebtedness. Proceeds from the sale were used to retire the $77 million outstanding Del Webb 10.25% senior subordinated notes and for general corporate purposes, including continued investment in our business.
At June 30, 2004, we had remaining authorization to purchase common stock aggregating $77.5 million, pursuant to our $100 million share repurchase program.
Our effective tax rate at June 30, 2004 was 38%. We anticipate that our effective tax rate for 2004 will approximate 38%, the same as our 2003 effective tax rate.
At June 30, 2004, we had cash and equivalents of $90.3 million and $2.6 billion of senior notes. Other financing included limited recourse collateralized financing totaling $128.6 million. Sources of our working capital include our cash and equivalents, our $850 million committed unsecured revolving credit facility and Pulte Mortgage’s $905 million committed credit arrangements.
Our debt-to-total capitalization, excluding our collateralized debt, was approximately 41.5% at June 30, 2004, and approximately 40.7% net of cash and equivalents. We expect to maintain our net debt-to-total capitalization at approximately the 40% level. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings.
At June 30, 2004, we had $1.0 billion remaining under our current mixed security shelf registration. As a result of our $400 million debt issue subsequent to June 30, 2004, our capacity under our shelf registration has been reduced to $600 million as of the date of this quarterly filing.
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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 to our customers any increases in our costs through increased sales prices. 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.
New Accounting Pronouncements:
In March 2004, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin (“SAB”) 105, Application of Accounting Principles to Loan Commitments. SAB 105 provides the SEC staff position regarding the application of accounting principles generally accepted in the United States to loan commitments that relate to the origination of mortgage loans held for resale. SAB 105 contains specific guidance on the inputs to a valuation-recognition model to measure loan commitments accounted for at fair value. Current accounting guidance requires the commitment to be recognized on the balance sheet at fair value from its inception through its expiration or funding. SAB 105 requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. In addition, SAB 105 requires the disclosure of both the accounting policy for loan commitments including the methods and assumptions used to estimate the fair value of loan commitments and any associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives and entered into subsequent to March 31, 2004. The issuance of SAB 105 had an insignificant impact on our results of operations, financial condition and cash flows.
Critical Accounting Policies and Estimates:
There have been no significant changes to our critical accounting policies and estimates during the six months ended June 30, 2004 compared with 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, 2003.
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 June 30, 2004, 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, 2003, 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 our actual results, performance or achievements 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 in our 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 we have little or no control.
Item 4. Controls and Procedures
Management, including our President & Chief Executive Officer and Executive Vice President & Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2004. Based upon, and as of the date of that evaluation, our President & Chief Executive Officer and Executive 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 we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
There has been no change in our internal control over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on May 13, 2004. The following matters were considered and acted upon, with the results indicated below.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number and Description
(b) Reports on Form 8-K
On July 27, 2004, we filed a Current Report on Form 8-K, reporting the information required by Item 12 in connection with our press release dated July 26, 2004, announcing our earnings for the three-month and six-month periods ended June 30, 2004. No financial statements were filed, although we furnished the financial information included in the press release with the 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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EXHIBIT INDEX
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