D.R. Horton, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. D.R. Horton is a U.S. homebuilder operating in 26 states and 77 markets, with mortgage and title services. Homebuilding generated about 97% of consolidated revenue.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Consolidated revenue | $4.354 billion | $3.637 billion |
| Income before taxes | $242.9 million | $12.1 million |
| Net income | $956.3 million | $71.8 million |
| Diluted EPS | $2.77 | $0.23 |
| Operating cash flow | $(298.1) million | $14.9 million |
| Cash and marketable securities | $1.346 billion | $1.030 billion |
| Total debt | $2.493 billion | $1.705 billion |
| Total equity | $3.595 billion | $2.624 billion |
- Homebuilding revenue rose 19% to $4.236 billion. The company closed 18,890 homes, up 13%, at an average price of $223,300, up 5%.
- Home sales gross margin improved 160 basis points to 17.7%; homebuilding pre-tax income was $203.7 million versus a $7.0 million loss. Homebuilding SG&A was 12.5% of revenue, down from 13.5%.
- Financial services revenue rose 35% to $117.8 million and pre-tax income rose to $39.2 million from $19.1 million.
- Net homebuilding debt to total capital was 21.4%, up from 18.0%; gross homebuilding debt to total capital was 39.1%. Management said near-term net leverage was intended to remain below its historical 40%–45% target range.
- Operating cash use reflected increased investment in land, lots, and homes. Investing activities used $138.3 million; financing activities provided $751.5 million, primarily through two $350 million senior-note issuances.
Material changes and notable items
- Net sales orders increased 21% to 21,048 homes, with order value up 29% to $4.803 billion. Year-end backlog grew 61% to $1.668 billion (7,240 homes); substantially all was scheduled to close in FY2013, subject to buyer contingencies and cancellations.
- Owned and controlled lots increased to 152,700 from 112,700; homes in inventory rose to 13,000 from 10,500. Inventory increased to $4.165 billion from $3.450 billion.
- Inventory impairments and land-option write-offs fell to $6.2 million from $45.4 million.
- Net income included a $713.4 million income tax benefit, principally from a $716.7 million reduction in the deferred-tax-asset valuation allowance in the third quarter. This benefit substantially exceeded pre-tax income and is not a measure of underlying operating profit.
- The Breland Homes acquisition was completed in August 2012 for $105.9 million in cash, with $9.4 million paid after year-end; it added inventory, lots, and backlog in Alabama and Mississippi.
Outlook, risks, and contingencies
- Management expected housing recovery to remain uneven and new-home demand to remain historically low while the broader economy and mortgage-credit conditions remained weak. It said that, if conditions did not deteriorate, its strategy could support increased profitability and a strong balance sheet in FY2013; this was conditional commentary, not quantified earnings guidance.
- Management expected an FY2013 effective tax rate of approximately 38.5%. Deferred tax asset realization depends on future taxable income; $41.9 million of valuation allowance remained at year-end.
- The company reported $2.493 billion of debt, including $1.1475 billion of principal maturing before the end of FY2014. The $500 million 2% convertible notes mature May 15, 2014 and are convertible at approximately $13.06 per share. The mortgage repurchase facility, with $187.8 million outstanding, was due to mature in March 2013. After year-end, the revolving credit facility was increased to $600 million, with potential capacity up to $1.0 billion subject to conditions and commitments.
- Construction-defect and other legal reserves were $544.9 million, with $225.0 million of insurance receivables recorded separately; estimates and recoveries are uncertain. Warranty liabilities were $56.8 million. Management warned that claim frequency or resolution costs above estimates could materially affect earnings and liquidity.
- Sales cancellations were 24% of gross orders, down from 27%, but financing contingencies remain a risk. Other major exposures include housing-market weakness, mortgage availability and rates, land and inventory values, labor/material shortages, regulation, and natural disasters.
- A Department of Labor investigation into wage-and-hour compliance remained unresolved; the company could not estimate potential costs and had recorded no liability. A February 2012 security breach involving its online loan prequalification system was investigated; the company said it found no evidence customer data had been accessed or exported.
Most important facts for investors to verify
- Whether backlog converts to closings and revenue, and whether cancellation rates and average selling prices remain favorable.
- Whether operating cash flow recovers as inventory and land investment increase, and how the larger lot position affects future margins and impairment risk.
- The timing and funding plan for near-term debt maturities, and renewal or replacement of the mortgage repurchase facility.
- The assumptions supporting deferred-tax-asset realization and the sustainability of earnings excluding the unusually large tax benefit.
- The adequacy of construction-defect reserves and insurance recoveries, and the outcomes of the wage-and-hour investigation and other contingencies.