PulteGroup (PHM) posted net income was $42 million, or $0.11 per share, after pretax charges of $88 million, or $0.14 per share, for insurance reserves and office relocation costs for the second quarter of 2014.
Net income for the second quarter reflects $26 million, or $0.07 per share, of income tax expense. Prior year net income was $36 million, or $0.09 per share, after pretax charges of $67 million, or $0.17 per share, resulting from a contractual dispute, debt repurchases and corporate relocation. Prior year net income reflects $2 million, or less than $0.01 per share, of income tax expense.
"The ongoing gains demonstrated in PulteGroup's second quarter operating results reflect the benefits of company-specific initiatives and favorable macro conditions that exist in today's housing market," said Richard J. Dugas, chairman, president and CEO of PulteGroup. "Price appreciation, which in combination with the operational improvements we continue to realize, supported a 480 basis point increase in gross margin to 23.6% and corresponding gains in quarterly net income."
"Our view of the U.S. housing market remains positive, as improvements in both the economy and employment provide ongoing support to an industry already benefiting from low inventory, low mortgage rates, better pricing and favorable demographic trends. Within this environment, our strong operating gains enable us to continue increasing investment into the business, while continuing to drive excellent returns on invested capital."
Home sale revenues for the second quarter increased 2% to $1.2 billion. Higher revenues for the period were driven by a 12% increase in average selling price to $328,000, partially offset by a 9% decrease in closings to 3,798 homes. The higher average selling price in the quarter is the result of price increases realized across all three of the company's brands serving entry level, move up and active adult homebuyers.
The company's home sale gross margin for the period was 23.6%, which is an increase of 480 basis points over the prior year. Homebuilding SG&A expense for the quarter was $230 million, or 18.4% of home sale revenues, compared with $151 million, or 12.3% last year. Higher SG&A for the period was due primarily to an $84 million charge for increased insurance reserves.
"The adjustment to insurance reserves was primarily driven by estimated costs associated with siding repairs in certain previously completed communities in the west that, in turn, impacted actuarial estimates for potential future claims," said Bob O'Shaughnessy, executive vice president and chief financial officer. "We are in the process of making needed repairs and look to complete the work in a timely and cost-efficient manner."
The value of net new orders for the second quarter increased 5% to $1.6 billion. On a unit basis, net new orders for the period were 4,778 homes, compared with 4,885 in the prior year. For the quarter, the company operated out of 589 communities, which is a decrease of 6% from the second quarter of 2013.
PulteGroup's quarter-end backlog was 8,179 homes valued at $2.8 billion, compared with a prior year backlog of 8,558 homes with a value of $2.7 billion. The average price of homes in backlog was $339,000 which is up 7% over last year and up 3% from the average selling price of homes delivered in the second quarter.
The company's financial services operations reported second quarter pretax income of $9 million compared with $16 million in the prior year. Mortgage capture rate for the quarter was 80%, which is unchanged from the prior year. The reduction in pretax income for the period was the result of lower origination volumes and the more competitive operating conditions that continue to exist within the mortgage industry.
During the quarter, PulteGroup invested $395 million in land acquisition and development. The company also repurchased 2.8 million shares of common stock for $53 million, or an average price of $19.12 per share. The company ended the quarter with $1.3 billion of cash.
Effective July 23, 2014, PulteGroup entered into a new three year, $500 million senior unsecured revolving credit facility. The revolver includes an uncommitted accordion feature which could increase its size to $1.0 billion, subject to certain conditions and availability of additional bank commitments. The revolver is expected to be used primarily to replace a letter of credit facility that is set to expire later this year.