D.R. Horton, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010. D.R. Horton builds and sells homes across 26 states and 72 markets; homebuilding generated approximately 98% of consolidated revenue. Figures are in U.S. dollars.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Consolidated revenue | $4.40 billion | $3.66 billion |
| Homebuilding revenue | $4.31 billion | $3.60 billion |
| Homebuilding gross profit | $682.1 million | $65.2 million |
| Homebuilding gross margin | 15.8% | 1.8% |
| Income (loss) before tax | $99.5 million | $(556.8) million |
| Net income (loss) | $245.1 million | $(549.8) million |
| Diluted earnings (loss) per share | $0.77 | $(1.73) |
| Net cash from operating activities | $709.4 million | $1.14 billion |
- Home closings rose 25% to 20,875, while the average closing price declined 3% to $206,100. Home sales gross margin increased 420 basis points to 17.3%.
- Financial services revenue rose to $90.5 million from $53.7 million; the segment returned to pretax income of $21.4 million from a $15.5 million loss.
- Inventory impairments and land-option write-offs fell to $64.7 million from $407.7 million. FY2010 included $62.3 million of inventory impairments and $2.4 million of option-cost write-offs.
- Cash and cash equivalents were $1.31 billion and marketable securities were $297.7 million at year-end. Homebuilding cash and securities totaled approximately $1.6 billion.
- Consolidated debt was $2.17 billion, down from $3.15 billion. Homebuilding debt was $2.09 billion; $296.4 million of total debt was scheduled to mature within 12 months. Total equity was $2.62 billion.
- Homebuilding net debt to total capital declined to 16.1% from 32.5%; gross homebuilding debt to total capital was 44.3%.
Changes and operating trends
- Results improved sharply from FY2009, reflecting more closings, higher home-sales margins, lower impairment charges, and improved financial-services results.
- Net sales orders increased 14% to 19,375 homes, but backlog fell 25% in value to $850.8 million (4,128 homes). The average backlog price increased 2% to $206,100.
- Sales cancellations improved to 26% of gross orders from 30%, but remained elevated versus historical levels. Net orders in FY2010’s third and fourth quarters were down 3% and 21%, respectively, year over year after the federal homebuyer tax credit expired.
- Inventory declined to $3.45 billion from $3.67 billion; homes in inventory fell to 9,500 from 11,600. Owned and optioned lots increased to 119,400 from 108,700.
- Operating cash flow declined from $1.14 billion. Cash decreased during FY2010 as the company repaid debt and purchased marketable securities; operating cash generation included substantial tax refunds and inventory-related cash flows.
Outlook, risks, and unusual items
- Management expected FY2011 home sales, closings, and profitability to be lower than FY2010, and anticipated lower gross profit percentage in the first half of FY2011. It expected less cash generation from asset reductions than in recent years.
- Management described housing demand as very weak and recovery timing as uncertain. Key risks include unemployment and consumer confidence, foreclosures and competing resale inventory, mortgage availability and rates, pricing pressure, and further inventory impairment.
- FY2010 net income included a $145.6 million income-tax benefit. A tax-law change enabled a five-year carryback of certain losses; the filing attributes $208.3 million of tax benefit to the FY2009 loss carryback. The full $902.6 million net deferred tax asset was offset by a valuation allowance.
- The company had no homebuilding revolving credit facility after terminating its $1.65 billion facility in 2009. DHI Mortgage’s $100 million repurchase facility matured in March 2011 and required renewal; the company said renewal could be more difficult or costly.
- Construction-defect and other litigation liabilities were $571.3 million, with related insurance receivables of $251.5 million. Management did not expect the matters to have a material adverse effect, but noted actual outcomes could exceed reserves. Chinese-drywall remediation costs incurred were $4.9 million, with $2.6 million accrued for remaining repairs; related lawsuits were ongoing.
- The company repaid or repurchased $1.02 billion principal of notes during FY2010. It recorded a $4.9 million net loss on early retirement of debt.
- The auditor reported that the financial statements were fairly presented under U.S. GAAP and internal control over financial reporting was effective as of September 30, 2010.
Most important facts for investors to verify
- Whether the expected FY2011 decline in sales, closings, and profitability occurred, particularly after the tax-credit-related demand surge ended.
- Backlog conversion and cancellations, including whether the 26% cancellation rate and falling backlog continued to improve or deteriorate.
- Cash generation excluding tax refunds and inventory reductions, and the company’s ability to meet near-term maturities and refinance or renew mortgage funding.
- Further inventory impairments, given $409.8 million of communities with impairment indicators and the sensitivity of valuations to prices, sales pace, and costs.
- Changes in litigation, warranty, and mortgage-repurchase reserves, including Chinese-drywall claims and possible recoveries.
- Whether deferred tax assets and tax refunds are realizable; the filing reports a full valuation allowance and $82.8 million of unrecognized tax benefits.