D.R. Horton, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011; comparative figures are for FY2010 unless otherwise noted. The filing also reports fourth-quarter results for the three months ended September 30, 2011. D.R. Horton is a U.S. homebuilder operating in 25 states and 73 markets; homebuilding generated about 98% of revenue, with mortgage and title services comprising the balance.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Consolidated revenue | $3.637 billion | $4.400 billion |
| Pre-tax income | $12.1 million | $99.5 million |
| Income tax benefit | $59.7 million | $145.6 million |
| Net income | $71.8 million | $245.1 million |
| Diluted EPS | $0.23 | $0.77 |
| Cash provided by operations | $14.9 million | $709.4 million |
| Total notes payable | $1.705 billion | $2.172 billion |
| Total equity | $2.624 billion | $2.623 billion |
- Homebuilding revenue fell 18% to $3.550 billion; 16,695 homes closed, down 20%, while average closing price rose 3% to $212,200. The price increase primarily reflected product mix, not broad market appreciation.
- Home sales gross margin declined 120 basis points to 16.1%. Total homebuilding gross profit was $526.3 million, or 14.8% of homebuilding revenue; homebuilding recorded a $7.0 million pre-tax loss versus $78.1 million of pre-tax income.
- Homebuilding SG&A declined 8% to $480.0 million, but rose to 13.5% of revenue from 12.1% as lower sales reduced cost absorption. Directly expensed homebuilding interest fell to $50.5 million from $86.3 million.
- Financial services pre-tax income was $19.1 million, down from $21.4 million. Revenue declined 4% to $87.2 million.
- Homebuilding cash and marketable securities totaled approximately $1.013 billion ($715.5 million cash and $297.6 million securities); financial-services cash was $17.1 million. Restricted cash included $47.5 million securing letters of credit. Net homebuilding debt to total capital was 18.0%, versus 16.1%; gross homebuilding debt to capital improved to 37.7% from 44.3%.
- Operating cash flow dropped sharply from FY2010, when tax refunds and other factors contributed substantially to cash generation. FY2011 cash declined by $576.7 million overall, including $572.3 million used in financing, notably debt repayments and dividends.
Fourth-quarter snapshot
For the three months ended September 30, 2011, revenue was $1.098 billion, gross profit $160.0 million, pre-tax income $33.8 million, net income $35.7 million, and diluted EPS $0.11. Quarterly results reflected improved performance from the first half, but management cautioned that the pattern may not continue.
Material changes versus FY2010
- Closings, homebuilding revenue, consolidated revenue, net income and operating cash flow all fell; management attributed much of the sales decline to the expiration of the federal homebuyer tax credit and continued weak demand.
- Net sales orders fell 10% in units and 7% in value to 17,421 homes and $3.728 billion. The annual cancellation rate rose to 27% from 26%.
- Year-end backlog increased 22% in value to $1.036 billion (4,854 homes); substantially all was scheduled to close in FY2012, but contracts remain subject to contingencies and cancellation.
- Inventory impairment charges and land-option cost write-offs totaled $45.4 million, down from $64.7 million. Management warned further impairments could occur if market, pricing, sales-pace or cost assumptions weaken.
- Homebuilding debt declined to $1.588 billion from $2.085 billion; consolidated debt also includes $116.5 million outstanding under the mortgage repurchase facility. The company repaid or repurchased $495.4 million principal amount of senior notes during FY2011.
Outlook, risks and unusual items
- Management said demand may be stabilizing but expects it to remain low for some time. Its operating strategy emphasizes liquidity, controlling land and construction investment, managing incentives and pricing, and matching overhead to production. It expected to remain profitable in FY2012 if market conditions did not deteriorate; this is conditional, not a quantified earnings forecast.
- The mortgage repurchase facility matures March 4, 2012; renewal, availability and pricing are uncertain. One of two institutions that purchased about 89% of FY2011 mortgage sales planned to exit correspondent lending after December 2011. The company was seeking replacement purchasers.
- Key risks include prolonged housing weakness, unemployment, tighter or less available mortgage financing, rising rates, competition from foreclosures and existing homes, land and inventory write-downs, cost inflation, regulation, and access to capital. Senior unsecured debt was rated below investment grade; the company had no homebuilding revolving credit facility.
- The company recorded a $59.7 million tax benefit, including a $61.4 million reduction in accruals for unrecognized tax benefits and related interest, partly offset by state tax accruals. Its $848.5 million deferred tax asset was fully offset by a valuation allowance; realization depends on future taxable income. Federal and state tax examinations were ongoing.
- Construction-defect and other litigation liabilities were $529.6 million, with related insurance receivables of $218.3 million. The company said estimating these exposures involves substantial judgment and additional charges could be significant. Chinese-drywall matters included $0.8 million of remaining repair liabilities and $6.4 million spent to date; potential recoveries were not recorded.
- A Department of Labor investigation into compliance with the Fair Labor Standards Act was pending; the company could not estimate potential costs. A California environmental matter was settled for a $172,500 penalty.
- A $5.3 million out-of-period adjustment increased FY2011 home sales gross margin and net income, related to an error in captive-insurance loss reserves; the company considered the prior-period and current-year effects immaterial.
Important facts for investors to verify
- Whether backlog converts to closings at expected volumes and prices, given 27% cancellations and buyer-financing contingencies.
- Renewal terms and capacity of the mortgage repurchase facility, plus replacement mortgage-loan purchasers after the announced exit.
- Future operating cash generation, liquidity and debt maturities, especially the $783.8 million scheduled for FY2014.
- Assumptions behind inventory impairment testing and the potential for further write-downs; inventory was $3.450 billion at year-end.
- Adequacy of construction-defect, warranty, mortgage-recourse and reinsurance reserves, and developments in the labor investigation and Chinese-drywall litigation.
- Evidence supporting any future release of the deferred-tax valuation allowance and the usability of tax-loss carryforwards.