Just when the black-ink earnings reports were becoming more likely than not among home builders, PulteGroup reported earnings Wednesday that carried nearly a billion dollars worth of red ink.
Almost all the $995 million, $2.63 a share, loss was related to one-time paper charges including a good will reduction of $655 million and $272 in increased reserves for construction and insurance related to an increase in claims.
Without all that, the company would have had a loss of $0.03 a share, slightly better than the $0.05 loss of analysts' consensus. Last year PulteGroup lost $1.15 a share in its third quarter.
PulteGroup's closings declined 7% to 3,865 and orders fell 12% to 3,566 compared with last year's third quarter, much less than many builders who saw both decline by a third.
"We are frustrated to be bumping along at the breaking even level," Richard J. Dugas Jr. told investors during the Wednesday morning call with analysts. "That is not acceptable. We want to be solidly profitable."
In order to help move the company toward greater profitability, the company is reorganizing to trim staff and costs. Savings there along with reductions in field costs, will cut $100 million from SG&A in 2011 compared to 2010, Dugas said.
"Quite frankly, what we have asked ourselves, given the run rate, if we were establishing the company (new) from the ground up, what would we need?," Dugas said.
A great deal of those cost reductions will come at the executive level, Dugas said. In the third quarter the company "flattened" its executive ranks and more recently it consolidated to operate out of four rather than six "areas," eliminating two teams entirely. As part of that move it also consolidated regional operations in Arizona, Florida, and New York/New Jersey, Dugas said.
Executives said they could not have foreseen the sudden spike in construction defect claims that spiked in the third quarter, causing the company to reserve more cash to fix the problems as well as to increase its self-insurance reserve fund in case the trend should continue. About 80% of the $272 million was put into the reserve funds. Because the spike in claims was sudden and significant, the company must assume that there will be more and reserve accordingly.
Answering analysts' questions about the type of claims and whether there was a particular market where they were appearing, management said there seemed to be more water intrusion claims, but that there was no pattern to where the claims were occurring.
"We certainly did not see it coming, but it was not one particular project, it was a number of them," Dugas said. "We are not aware of anything we did different, frankly, than anyone else. Hopefully it's just one of those things that happen that won't occur again."
The company ended the quarter with just under 150,000 lots. Its community count was down by about 17% for the year, but management cautioned analysts about looking at community count numbers because the acquisition of Centex brought in a number of smaller communities that are closing out faster, leading to what might be a lower community count next year.
Pulte said it is seeing 200- to 400-basis-point higher margins in its new communities that it has acquired recently compared to its longer-held assets because many are finished lots bought at less than the cost to develop today. The company said it will try to bring more of those higher-margin communities on board but is being cautious about purchases.
"We don't want to acquire anything that will ultimately get impaired," Dugas said.
Pulte, like other public builders, offered some information about its potential exposure to requests to buy back non-performing mortgages that its lending arm issued and then sold to investors.
Out of 315,716 loans Pulte and Centex's mortgage entities made between 2005 and 2008i it has received re-purchase requests for 2,405 of them, 0.8%, for a total value of $529 million. Fifty percent of those are refuted by Pulte Mortgage.
Executives said they think the mortgage company should have adequate reserves to handle any valid claims.