UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ 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 þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act).YES þ NO o
Number of shares of common stock outstanding as of April 30, 2005: 128,965,066
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.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Note: The condensed consolidated balance sheet at December 31, 2004, 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”) and variable interest entities in which the Company is deemed to be the primary beneficiary. 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.
In January 2005, the Company sold all of its Argentina operations. At December 31, 2004, the Argentina operations were classified as held for sale and presented as discontinued operations in the consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles 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 United States generally accepted accounting principles 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-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004.
Certain amounts previously reported in the 2004 financial statements and notes thereto were reclassified to conform to the 2005 presentation.
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)
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 recognizes compensation expense on an accelerated basis over the vesting period based on the fair value provisions of SFAS No. 123. Grants made prior to January 1, 2003 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 if the Company had applied the fair value recognition provisions of SFAS No. 123 to all stock based employee compensation. 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 $2.6 million and $1.1 million for the three months ended March 31, 2005 and 2004, respectively. These amounts have been excluded from the reconciliation above as they would have no impact on pro forma net income as presented.
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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 FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” as amended by FIN 46-R issued in December 2003 (collectively referred to as “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. Creditors of the variable interest entities have no recourse against the Company.
In applying the provisions of FIN 46, the Company evaluated all land option agreements 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 March 31, 2005 and December 31, 2004, the Company classified $134.1 and $106.4 million, respectively, as land, not owned, under option agreements on the balance sheet, representing the fair value of land under contract, including deposits of $17.5 million and $18.9 million, respectively. The corresponding liability has been classified within accounts payable, accrued and other liabilities on the balance sheet.
Land option agreements that did not require consolidation under FIN 46 at March 31, 2005 and December 31, 2004, had a total purchase price of $6.9 billion and $6.3 billion, respectively. In connection with these agreements, the Company had deposits and advanced costs of $332 million and $311.7 million, included in other assets, as well as letters of credit and surety bonds posted in lieu of cash deposits at March 31, 2005 and December 31, 2004, respectively.
New accounting pronouncements
On December 15, 2004, the Financial Accounting Standards Board issued SFAS No. 123, Share-Based Payment, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires that all share-based payments to employees, including grants of employee stock options, be accounted for at fair value. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The Company previously adopted the fair-value-based method of accounting for share-based payments under SFAS No. 123 effective January 1, 2003 using the prospective method described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, the Company uses the Black-Scholes model to estimate the value of stock options granted to employees and is considering the lattice model. Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because the Company adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R). SFAS No. 123(R) also amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. As originally issued, SFAS No. 95 required all income tax payments to be classified as operating cash outflows. This statement is effective for fiscal periods beginning after December 15, 2005. The Company is still evaluating the impact of adopting SFAS No. 123(R).
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The Company’s operations are classified into 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 operations conducted through Pulte Mortgage and other subsidiaries.
Corporate is a non-operating segment that supports the operations of the Company’s 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 $309.3 million at March 31, 2005 and $258.9 million at December 31, 2004. All of these investments are accounted for under the equity method, except for the Company’s ownership interest in a Mexican mortgage banking company, as described below.
During February 2005, 25% of the Company’s investment in the capital stock of a mortgage banking company in Mexico was redeemed for a gain of approximately $620 thousand. The remaining ownership interest of 16.66% is accounted for under the cost method.
The Company’s $125 million, 7.3% unsecured senior notes are due in October 2005. The Company anticipates repaying these notes by issuing new unsecured senior notes and/or by using cash flows provided by operations in 2005.
In February 2005, the Company sold $350 million of 5.2% senior notes, which mature on February 15, 2015, and $300 million of 6% senior notes, which mature on February 15, 2035, which are guaranteed by Pulte Homes, Inc. and certain of its 100%-owned subsidiaries. These notes are unsecured and rank equally with all of the Company’s other unsecured and unsubordinated indebtedness. Proceeds from the sale were used to repay the indebtedness of the Company’s revolving credit facility and for general corporate purposes, including continued investment in the Company’s business.
In connection with the sale of the $300 million unsecured senior notes, as noted above, $250 million in securities were available for sale under the Company’s shelf registration statement on Form S-3. As permitted by the rules of the Securities and Exchange Commission (the “SEC”), the additional $50 million of securities were to be registered through a supplemental registration statement filed at the time of sale pursuant to Rule 462(b) of the Securities Act of 1933 (the “Securities Act”). The Company recently discovered that, due to an administrative error, the supplemental registration statement was not filed with the SEC. Consequently, $50 million of the notes were sold without registration under the Securities Act, which may give rise to certain claims by purchasers of the notes under Section 12(a)(1) of the Securities Act. The Company would vigorously defend against any such claims and believes that the aggregate impact of any such claims, if successful, would be immaterial. The Company further believes it would be impossible to determine which notes have been affected by its administrative error.
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During April 2005, the Company amended its credit agreement to increase its committed unsecured revolving credit facility from $1.310 billion to $1.345 billion.
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. During the first quarter of 2005, the Company repurchased 170,000 shares for a total of $11.6 million and at March 31, 2005 had remaining authorization to purchase common stock aggregating $51.2 million.
Accumulated other comprehensive income (loss)
The accumulated balances related to each component of other comprehensive income (loss) are as follows ($000’s omitted):
At March 31, 2005, Pulte Homes, Inc. had the following outstanding senior note obligations: (1) $125 million, 7.3%, due 2005, (2) $400 million, 4.875%, due 2009, (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) $350 million, 5.2%, due 2015, (8) $150 million, 7.625%, due 2017, (9) $300 million, 7.875%, due 2032, (10) $400 million, 6.375%, due 2033, and (11) $300 million, 6%, due 2035. 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, except as described in Note 4. 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 SHEETMarch 31, 2005($000’s omitted)
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CONSOLIDATING BALANCE SHEETDECEMBER 31, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended March 31, 2005($000’s omitted)
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CONSOLIDATING STATEMENT OF OPERATIONSFor the three months ended March 31, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended March 31, 2005($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWS (continued)For the three months ended March 31, 2005($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWSFor the three months ended March 31, 2004($000’s omitted)
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CONSOLIDATING STATEMENT OF CASH FLOWS (continued)For the three months ended March 31, 2004($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, 2005 and 2004 is as follows ($000’s omitted):
A comparison of pre-tax income for the three months ended March 31, 2005 and 2004 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 are as follows ($000’s omitted):
Domestic Homebuilding
The Domestic Homebuilding business unit represents our core business. Our operations are conducted in 47 markets located throughout 27 states, presented geographically as follows:
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Homebuilding Operations (continued)
Domestic Homebuilding (continued)
The following table presents selected unit information for our Domestic Homebuilding operations:
Continued strong demand for new homes, an increase in the number of active communities, and market share expansion drove increases in net new orders, unit settlements and unit backlog, particularly in the Northeast and Southeast. Net new orders increased 12% to a record 12,067 units for the three months ended March 31, 2005, over the same period in 2004. Unit settlements also set a record for the quarter at 8,019 units, representing an increase of 14% over the same period in 2004. The average selling price for homes closed increased 11% to $307,000 for the three months ended March 31, 2005. Changes in average selling price reflect a number of factors, including changes in market selling prices, primarily in the West, and the mix of product closed during each period. Ending backlog, which represents orders for homes that have not yet closed, grew to a record 19,964 units. The dollar value of backlog was up 22% to $6.5 billion. For the quarter ended March 31, 2005, we had 640 active communities, an increase of 18% from the same period in the prior year.
During October 2004, we lowered pricing in Las Vegas to better align pricing in our communities with pricing in the market. Since the price reductions took effect, our communities in Las Vegas have experienced increased traffic and new order activity. Net signups for the three months ended March 31, 2005 were 835 homes, a decrease of 27% or 311 units from the same period in 2004, but an increase of 183% or 540 units from the three months ended December 31, 2004. As a result of continued improvement in Las Vegas operations, we do not anticipate the need to provide market level detail in future periods.
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The following table presents markets that represent 10% or more of unit new orders, unit settlements, and settlement revenues for the three months ended March 31, 2005 and 2004:
At March 31, 2005 and December 31, 2004, our Domestic Homebuilding operations controlled approximately 362,200 and 343,400 lots, respectively. Approximately 164,400 and 158,000 lots were owned, and approximately 136,600 and 125,800 lots were under option agreements approved for purchase at March 31, 2005 and December 31, 2004, respectively. In addition, there were approximately 61,200 and 59,600 lots under option agreements, pending approval, at March 31, 2005 and December 31, 2004, respectively.
The total purchase price applicable to approved land under option for use by our homebuilding operations at future dates approximated $4.7 billion at March 31, 2005. In addition, total purchase price applicable to land under option pending approval was valued at $2.4 billion at March 31, 2005. Land option agreements, which may be cancelled at our discretion, may extend over several years and are secured by cash deposits totaling $348 million, which are generally non-refundable.
The following table presents a summary of pre-tax income for our Domestic Homebuilding operations for the three months ended March 31, 2005 and 2004 ($000’s omitted):
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Domestic homebuilding gross profit margins from home settlements increased to 24.6% for the three months ended March 31, 2005, compared with 21.9% for the same period in the prior year. This increase is primarily attributable to favorable home pricing and product and geographic mix, as well as our ongoing initiatives to improve operational efficiencies, offset by material cost increases experienced in 2004 carrying over into early 2005.
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. Gross profits from land sales for the first quarter of 2005 were $3.4 million, comparable 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 to 10.3% for the three months ended March 31, 2005 compared with 10.6% for the same period in the prior year. This improvement can be attributed to increased selling prices and better overhead leverage from increased volume compared with the prior year period.
The increase in equity income for the first quarter of 2005, compared with the prior year period, was primarily due to increased income from our joint venture which supplies and installs basic building components and operating systems.
International Homebuilding
Our International Homebuilding operations are primarily conducted through subsidiaries of International in Mexico and Puerto Rico.
The following table presents selected financial data for our International Homebuilding operations for the three months ended March 31, 2005 and 2004 ($000’s omitted):
International revenues and unit settlements for the three months ended March 31, 2005 decreased 9% and 18%, respectively, from the prior year period. However, product mix shifts had a positive impact on gross margins. Gross margins increased approximately 440 basis points to 23.3% for the three months ended March 31, 2005. Selling, general and administrative expenses as a percent of revenues increased to 22.4% from 16.5% for the three-month period due to increased marketing expenses, primarily new community start-up expenses, and non-recurring and administrative costs.
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International Homebuilding (continued)
During January 2005, the minority shareholders of Pulte Mexico S. de R.L. de C.V. (“Pulte Mexico”) exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to us, the consummation of which would result in our owning 100% of Pulte Mexico. Accordingly, we purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million. The purchase of the remaining 40% minority interest, for approximately $12.5 million, will be completed in the second quarter of 2005, subject to regulatory approval by an agency of the Mexican government.
Our operations in Mexico are affected by fluctuations in currency rates for those countries. Transaction gains and losses for the three months ended March 31, 2005 and 2004, included in other income (expense), net, were not significant. During the three months ended March 31, 2005 and 2004, we recorded foreign currency translation gains of $1.1 million and $1.6 million, respectively, as a component of accumulated other comprehensive income on the balance sheet. At March 31, 2005, our investments in Puerto Rico and Mexico, net of accumulated foreign currency translation adjustments, approximated $28.7 million and $92.2 million, respectively. At December 31, 2004, our investment in Puerto Rico and Mexico, net of accumulated foreign currency translation adjustments, approximated $28.8 million, and $72.2 million, respectively.
Financial Services Operations
We conduct our financial services business, which includes mortgage and title operations, through Pulte Mortgage and other subsidiaries. Pre-tax income of our financial services operations was $10.1 million for the three months ended March 31, 2005 and 2004. Loan originations for the three months ended March 31, 2005 increased 24% to 7,592 mortgages.
The following table presents mortgage origination data for our Financial Services operations:
Mortgage origination unit and principal volume for the three months ended March 31, 2005 increased 24% and 29%, respectively, over 2004. The growth is attributable to an increase in the capture rate from 86% to 89% for the three-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 account for the majority of total loan production, representing 95% of total Pulte Mortgage unit production for the three months ended March 31, 2005, compared with 89% in 2004. Refinancings accounted for approximately 2% of total unit originations for the three months ended March 31, 2005, compared with 4% in the prior year period. At March 31, 2005, loan application backlog increased to $4.4 billion as compared with $2.9 billion at March 31, 2004.
Adjustable rate mortgages (ARMs), which generally have a lower profit per loan than fixed rate products, represented 53% of total funded origination dollars and 52% of total funded origination units for the three months ended March 31, 2005, compared with 31% and 29% in the prior year period, respectively. Interest only mortgages, a component of ARMs, represented 24% of ARMs origination dollars and 46% of ARMs origination units for the three months ended March 31, 2005, compared with 4% and 14% in the prior year period, respectively.
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Financial Services Operations (continued)
Income from our title operations increased to $4.3 million for the three months ended March 31, 2005, from $3.2 million in 2003. Our minority interest in Su Casita, a Mexican mortgage banking company, contributed income of approximately $700 thousand for the three months ended March 31, 2005, compared with $800 thousand for the same period in 2004.
During February 2005, 25% of our investment in the capital stock of Su Casita was redeemed for a gain of approximately $620 thousand. Our remaining ownership interest of 16.66% is accounted for under the cost method.
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.
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 months ended March 31, 2005 and 2004 ($000’s omitted):
Interest expense, net of interest capitalized into inventory, increased $2.1 million in the three months ended March 31, 2005. This is a result of the continued increase in debt levels necessary to support our growth. Interest incurred for the three months ended March 31, 2005 and 2004, excluding interest incurred by our financial services operations, was approximately $55.7 and $48.8 million, respectively.
The increase in other corporate expenses, net for the three months ended March 31, 2005 is due to higher corporate overhead.
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 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
We finance our homebuilding land acquisitions, development and construction activities from internally generated funds and existing credit agreements.
At March 31, 2005, we had cash and equivalents of $350.7 million and $3.5 billion of senior and unsubordinated notes outstanding. Other financing included limited recourse collateralized financing totaling $79.1 million. Sources of our working capital include our cash and equivalents, our $1.345 billion committed unsecured revolving credit facility and Pulte Mortgage’s $940 million committed credit arrangements.
During April 2005, we amended our credit agreement to increase our committed unsecured revolving credit facility from $1.310 billion to $1.345 billion. We had no outstanding borrowings under this unsecured revolving credit facility at March 31, 2005.
Our debt-to-total capitalization, excluding our collateralized debt, was approximately 42.4% at March 31, 2005, and approximately 39.8% net of cash and equivalents. We routinely monitor current operational requirements and financial market conditions to evaluate the use of available financing sources, including securities offerings.
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 March 31, 2005, Pulte Mortgage had committed credit arrangements of $940 million comprised of a $390 million bank revolving credit facility and a $550 million annual asset-backed commercial paper program.
Our income tax liability and related effective tax rate are affected by a number of factors. At March 31, 2005, our effective tax rate was 37.3% compared to 38% at March 31, 2004. The reduction in the effective tax rate for 2005 was principally due to the new manufacturing deduction established by the American Jobs Creation Act of 2004. We anticipate that our effective tax rate for 2005 will be approximately 37.3%.
Our net cash used in operating activities for the quarter ended March 31, 2005, amounted to $264.7 million, compared with $117.8 million for the year ended March 31, 2004. The increases in net income for both years were offset primarily by significant investments in land necessary to support the continued growth of the business.
Cash used in investing activities was $72.4 million for the quarter ended March 31, 2005, compared with $33.8 million in the prior year. The change in net cash used in investing activities primarily relates to our investments in unconsolidated entities.
During the first quarter of 2005, we invested approximately $12.5 million in new joint ventures that develop and/or sell land within the United States. Also, we contributed $71.5 million of additional capital contributions to and received $33.2 million in distributions from our unconsolidated joint ventures for the quarter ended March 31, 2005. Further, we incurred approximately $20.7 million in capital expenditures to support the growth of our business.
Net cash provided by financing activities totaled $373.2 million for the quarter ended March 31, 2005. Cash inflows from financing activities for the quarter ended March 31, 2005 are primarily attributed to the issuance of senior notes. Cash outflows from financing activities for the quarter ended March 31, 2005 primarily relate to repayment of debt from Pulte Mortgage’s committed credit arrangements, dividends paid and stock repurchases.
Our $125 million, 7.3% unsecured senior notes are due in 2005. We anticipate repaying these notes in 2005 by issuing new unsecured senior notes and/or using cash provided by operations.
During January 2005, the minority shareholders of Pulte Mexico exercised a put option under the terms of a reorganization agreement dated as of December 31, 2001, to sell their shares to us, the consummation of which would result in our owning 100% of Pulte Mexico. Accordingly, we purchased 60% of the minority interest of Pulte Mexico for approximately $18.7 million. The purchase of the remaining 40% minority interest, for approximately $12.5 million, will be completed in the second quarter of 2005, subject to regulatory approval by an agency of the Mexican government.
In February 2005, we sold $350 million of 5.2% senior notes, which mature on February 15, 2015, and $300 million of 6% senior notes, which mature on February 15, 2035, which 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 repay the indebtedness of our revolving credit facility and for general corporate purposes, including continued investment in our business.
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Liquidity and Capital Resources (continued)
In connection with the sale of the $300 million unsecured senior notes, as discussed above, $250 million in securities were available for sale under our shelf registration statement on Form S-3. As permitted by the rules of the Securities and Exchange Commission (the “SEC”), the additional $50 million of securities were to be registered through a supplemental registration statement filed at the time of sale pursuant to Rule 462(b) of the Securities Act of 1933 (the “Securities Act”). We recently discovered that, due to an administrative error, the supplemental registration statement was not filed with the SEC. Consequently, $50 million of the notes were sold without registration under the Securities Act, which may give rise to certain claims by purchasers of the notes under Section 12(a)(1) of the Securities Act. We would vigorously defend against any such claims and believe that the aggregate impact of such claims, if successful, would be immaterial. We also believe it would be impossible to determine which notes have been affected by our administrative error.
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
On December 15, 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), Share-Based Payment, which amends SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) requires that all share-based payments to employees, including grants of employee stock options, be accounted for at fair value. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123(R), we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. We previously adopted the fair-value-based method of accounting for share-based payments under SFAS No. 123 effective January 1, 2003 using the prospective method described in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Currently, we use the Black-Scholes model to estimate the value of stock options granted to employees and we are considering the lattice model. Because SFAS No. 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because we adopted SFAS No. 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under SFAS No. 123 will be recognized under SFAS No. 123(R). SFAS No. 123(R) also amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. As originally issued, SFAS No. 95 required all income tax payments to be classified as operating cash outflows. This statement is effective for fiscal periods beginning after December 15, 2005. We are still evaluating the impact of adopting SFAS No. 123(R).
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, 2005 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, 2004.
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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, 2005, 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, 2004, and is incorporated herein by reference.
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 March 31, 2005. 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 March 31, 2005 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number and Description
(b) Reports on Form 8-K
On April 28, 2005, we filed a Current Report on Form 8-K, reporting the information required by Item 2.02 in connection with our press release dated April 27, 2005, announcing our earnings for the three-month period ended March 31, 2005. 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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