Just when the black ink earnings reports were becoming more likely than not among home builders, PulteGroup reported quarterly financials Wednesday that carried nearly $1 billion worth of red ink.
Almost all the $995 million--or $2.63 per share--loss was related to one-time paper charges, including a loss in goodwill reduction of $655 million and $272 million in increased reserves for construction and insurance, which is related to an increase in claims at PulteGroup.
Without those impairments, PulteGroup would have had a loss of 3 cents per share, which would have been slightly better than the 5 cent per share loss that analysts expected. Last year PulteGroup lost $1.15 per share in its third quarter.
According to financial reports, PulteGroup’s closings declined 7% to 3,865 and orders fell 12% to 3,566 compared with last year’s third quarter. Those declines are much less dramatic than many other builders who saw both statistics decline by one-third in the most recent quarter.
Still, “[w]e 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.”
To move the company toward profitability, PulteGroup is reorganizing to trim staff and costs. Those savings, along with reductions in field costs, will cut $100 million from the SG&A in 2011 compared to 2010, Dugas said.
“Quite frankly, what we have asked our selves, 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. This caused PulteGroup 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, executives said.
Answering analysts’ questions about the type of claims and whether there was a particular market where they were appearing, PulteGroup executives said that 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 fewer than 150,000 lots. Its community count was down by about 17% for the year, but PulteGroup executives cautioned analysts about looking at community count numbers; the Centex acquisition brought in a number of smaller communities that are closing out faster, leading to what might be a lower community count for the public home building firm next year.
PulteGroup also said it is seeing 200- to 400-basis-point higher margins in its newly acquired communities 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.
PulteGroup, like other public builders recently, offered some information about its potential exposure to requests to buy back non-performing mortgages issued by its lending arm and then sold to investors.
Out of 315,716 loans that Pulte and Centex’s mortgage entities made between 2005 and 2008, 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.
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.